Considerations for Foreign Banks Financing in the United ... … · 8 Considerations for Foreign Banks Financing in the United States 2019 update We are Morrison & Foerster – a

AuthorsZe’-ev Eiger

Susan Gault-Brown

Lloyd Harmetz

Jiang Liu

Barbara Mendelson

Bernie Pistillo

Hillel Cohn

Kelley Howes

Elizabeth Schauber

IFLRinternational Financial Law Review

Considerations for Foreign Banks Financing in the United States2019 Update

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Considerations for Foreign Banks Financing in the United States 2019 update 1

Financial institutions, including foreign banks, regularly access the capital markets andseek to diversify their funding alternatives. Foreign banks may seek to access the UScapital markets without subjecting themselves to registration with, and oversight from,the US Securities and Exchange Commission (SEC).

This brief summary is intended to outline the most common capital raising approaches usedby foreign banks, and the issues that foreign banks should consider in structuring offerings ofsecurities, certificates of deposit, or commercial paper in the US.We also discuss continuous offering programmes, such as bank note and medium-term note

programmes, since these are used by foreign banks that are frequent issuers. Finally, we addressissuances of structured products into the US and the use of the US-Canadian MultijurisdictionalDisclosure System (MJDS). We hope that this overview provides a helpful guide.

Introduction

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2 Considerations for Foreign Banks Financing in the United States 2019 update

Introduction 1About the authors 5About the firm 8

CHAPTER 1

General overview of securities registration and disclosure requirements 9

CHAPTER 2

Overview of financing through exempt offerings 16

CHAPTER 3

Overview of continuous issuance programmes 25

CHAPTER 4

Mechanics of a section 4(a)(2) offering 31

CHAPTER 5

Mechanics of a Rule 144A/Regulation S offering 39

CHAPTER 6

Section 3(a)(2) and considerations for foreign banks financing in the US 47

CHAPTER 7

Bank deposit products versus securities 54

Contents



CHAPTER 8

Considerations related to commercial paper 58

CHAPTER 9

Exchange Act registration 67

CHAPTER 10

Foreign banks and the Investment Company Act of 1940 79

CHAPTER 11

Blue sky laws 84

CHAPTER 12

Regulation by the Financial Industry Regulatory Authority 88

CHAPTER 13

Special considerations related to structured products 94

CHAPTER 14

The US-Canadian multijurisdictional disclosure system 101

CHAPTER 15

Schedule B filers 112





AuthorsZe’-ev D. Eiger is a partner in the corporate finance | capital markets group of the New Yorkoffice of Morrison & Foerster. His practice focuses on securities and other corporate transactionsfor both foreign and domestic companies. He represents issuers, investment banks/financialintermediaries, and investors in financing transactions, including public offerings and privateplacements of equity and debt securities. Mr Eiger also represents foreign private issuers inconnection with securities offerings in the US and the euro markets, and financial institutionsin connection with domestic and international offerings of debt securities and medium-termnote programmes.

Susan Gault-Brown is a partner in the financial services group of the Washington, DC office ofMorrison & Foerster. She serves as chair of the firm’s investment management group and co-chair of the firm’s blockchain + smart contracts group. Ms. Gault-Brown advises participants inthe investment management, fintech, and financial services industries – including investmentadvisers, exempt reporting advisers, broker-dealers, funding portals, private funds, commoditytrading advisors, commodity pool operators, fintech companies, and cryptocurrency andblockchain companies – on regulatory, transactional, and counseling matters involving thesecurities and derivatives laws. She also regularly provides advice with respect to exemptions, no-action letters, and other forms of regulatory relief.

Lloyd S. Harmetz is a partner in the corporate finance | capital markets group of the New Yorkoffice of Morrison & Foerster. He focuses on securities offerings and other corporatetransactions for US and non-US companies. Mr. Harmetz’s experience includes public offerings,private placements and PIPE offerings of equity and debt securities, in which he represents bothissuers and underwriters. His practice focuses on securities offerings by financial institutions,including investment grade securities and structured products linked to equities, commodities,interest rates and other underlying assets. Mr Harmetz’s practice also specialises in structuringcontinuous offering programmes that are registered under the Securities Act, or that are exemptfrom registration under Regulation S, Rule 144A and Section 3(a)(2) of the Securities Act.

About the authors



Jiang Liu is a partner in the financial services group of the New York office of Morrison &Foerster. His practice spans a broad range of bank regulatory work, and he has significantexperience representing foreign and US financial institutions. Mr. Liu has in-depth knowledgeof the regulations applicable to foreign and US financial institutions. He regularly providesadvice in connection with the Bank Holding Company Act, the Volcker Rule, bank securitiesactivities, and US bank and non-bank acquisitions, among other things. Mr. Liu has asubstantial practice representing foreign financial institutions, especially those in China, relatedto their US activities.

Barbara Mendelson is a partner in the financial services group in the New York office ofMorrison & Foerster. Her practice involves advising foreign and US banks in a variety ofcomplex regulatory matters, including sales and acquisitions of US banking and non-bankingfirms, Dodd-Frank Act issues, applications to federal and state bank regulators for expansion ofactivities and new products, Bank Secrecy Act and OFAC matters, and over-the-counter andexchange-based trading of various instruments and derivatives. In addition to her bankregulatory practice, Ms. Mendelson works with sovereign entities and multilateral organisationswith respect to the investment of their foreign currency reserves and other assets.

Bernie J. Pistillo is a partner in the federal tax group of the San Francisco office of Morrison &Foerster. Mr. Pistillo regularly advises on the US federal income tax aspects of international anddomestic M&A, corporate restructurings and spinoffs, and tax controversy matters in theinternational area, particularly transfer pricing, the development and exploitation of technologyand intellectual property and the structuring of international operations for both start-upentities and existing corporate groups. He also advises on financial product development and thetax aspects of financial institution and insurance company operations. His practice involves thecoordination of tax laws in multiple jurisdictions to develop and implement cross-jurisdictionaltax planning, overall operational synergies and worldwide tax minimisation strategies. Mr.Pistillo also is regularly involved in the negotiation of strategic joint ventures and partnershipsand the structuring of private equity funds and their investments.


Hillel Cohn is senior of counsel in the corporate group of the Los Angeles office of Morrison &Foerster. He specialises in securities regulatory matters, including representation of foreignbanking organisations, broker-dealers and investment advisers on securities compliance andregulatory issues. Mr. Cohn assists such clients with designing their operations and products tocomply with applicable laws, provides advice on securities compliance issues and providescounsel in their dealings with the SEC, Finra and other US regulatory authorities. In addition,he has worked on a number of acquisitions, joint ventures, correspondent agreements,financings and restructurings of broker-dealers and investment advisers. He also advises publiccompanies with respect to corporate governance, SEC compliance, securities offerings, mergers,acquisitions, and joint ventures. He has extensive experience handling public offerings of equity,debt and real estate securities and has also represented a number of emerging technology and lifescience companies in dozens of venture financings.

Kelley Howes is of counsel in the investment management group of the Denver office ofMorrison & Foerster. She serves as vice chair of the firm’s investment management group. Ms.Howes has experience with a wide range of legal, regulatory, compliance, corporate governance,insurance, and other matters relating primarily to the representation of US registered andunregistered investment companies, offshore funds, registered investment advisers, transferagents, and broker-dealers. She has counseled independent fund directors on governance issues,and has advised mutual funds on mergers, reorganisations, compliance, and regulatory matters,including examinations and enforcement matters. Ms. Howes has also advised public companieswith regard to corporate governance and various corporate transactional matters, includingmergers and acquisitions, subsidiary ownership issues, and equity and debt issuances.

Elizabeth Schauber is an associate in the corporate finance | capital markets group of the NewYork office of Morrison & Foerster. Her practice focuses on securities and corporate financetransactions. Ms. Schauber represents underwriters and issuers in financing transactions,including public offerings and private placements of equity and debt securities. She also hasexperience with equity derivative instruments in cross-border financings, M&A and othercorporate transactions.




We are Morrison & Foerster – a global firm of exceptional credentials. Our clients include someof the largest financial institutions, investment banks, Fortune 100, technology and life sciencecompanies. We’ve been included on The American Lawyer’s A-List for 14 years, and theFinancial Times named the firm one of the top 20 most innovative firms in the US. Our lawyersare committed to achieving innovative and business minded results for our clients, whilepreserving the differences that make us stronger.

Morrison & Foerster’s capital markets | corporate finance practice advises on a broad range ofdomestic and international private and public financings. We are consistently ranked as one ofthe most active securities firms, representing issuers and underwriters in hundreds of securitiesofferings around the globe. Our practice extends to all kinds of debt instruments, equitysecurities, derivatives, and structured products and includes financings in markets worldwide.

Visit us at www.mofo.com.

About the firm


http://www.mofo.com

Foreign issuers, including foreign banks, which areconsidering accessing the US capital marketshave a number of financing alternatives. As apreliminary matter, a foreign (non-US

domiciled) issuer must choose between undertaking apublic offering in the US, which would subject the issuerto ongoing securities reporting and disclosurerequirements, or undertaking a limited offering that willnot subject the issuer to US reporting obligations.

Registration requirementsAn issuer may conduct a public offering in the US byregistering the offer and sale of its securities pursuant tothe Securities Act of 1933, as amended (Securities Act),and also registering its securities for listing or trading on aUS securities exchange pursuant to the Securities ExchangeAct of 1934, as amended (Exchange Act). Section 5 of theSecurities Act sets forth the registration and prospectusdelivery requirements for public offerings of securities.In connection with any offer or sale of securities in

interstate commerce or through the use of the mails,section 5 requires that a registration statement must be ineffect and a prospectus meeting the prospectusrequirements of section 10 of the Securities Act must bedelivered prior to sale. As discussed further below, theSecurities Act is a disclosure statute. Its purpose is toensure that an issuer provides investors with completedisclosure about the securities that it is offering. Theregistration and prospectus delivery requirements ofsection 5 require filings with the Securities and ExchangeCommission (SEC) and are intended to protect investorsby providing them with sufficient information about theissuer and its business and operations, as well as about theoffering, in order that they may make informedinvestment decisions.As a result, in connection with a public offering of

securities, an issuer must provide extensive informationabout its business and financial results. The preparation ofthe principal disclosure document (the registrationstatement) is a time-consuming and expensive process. Wedo not discuss the factors to be considered in connectionwith preparing a registration statement, or the steps

required in connection with the preparation of thedocument. Once filed, the SEC will review the documentclosely and provide the issuer with detailed comments. Thecomment process may take as long as 60 to 90 days once adocument has been filed with the SEC.Once all of the comments have been addressed and the

SEC staff is satisfied that the registration statement isproperly responsive, the registration statement may beused in connection with the solicitation of offers topurchase the issuer’s securities. Depending upon the natureof the issuer (whether it is a domestic or foreign privateissuer) and the nature of the securities being offered by theissuer, the issuer may use one of various forms ofregistration statement.Once an issuer has determined to register its securities

under the Securities Act, it usually also will apply to havethat class of its securities listed or quoted on a securitiesexchange and, in connection with doing so, will register itssecurities under the Exchange Act. The Exchange Actrequires registration of securities for the benefit ofinvestors that purchase securities in the secondary market.The Exchange Act imposes two separate but relatedobligations on issuers: registration obligations andreporting obligations. Section 12 of the Exchange Act setsforth the requirements for registration of securities underthe Exchange Act and requires that an issuer register a classof its securities with the SEC under two circumstances,pursuant to either section 12(b) or 12(g). Pursuant tosection 12(b) of the Exchange Act, an issuer must registera class of its equity or debt securities under the ExchangeAct prior to the listing of those securities on a nationalsecurities exchange.The Section 12(b) registration requirement is applicable

regardless of whether the securities previously have beenregistered under the Securities Act. Section 12(g) of theExchange Act requires registration when the issuer hastotal assets exceeding $10 million and a class of equitysecurity held of record by 2,000 or more persons or 500 ormore persons who are not accredited investors (AIs) asdefined in Securities Act Rule 501(a). Section 13(a) of theExchange Act imposes reporting obligations on an issuerthat has registered a class of securities under section 12 of


CHAPTER 1

General overview of securities registration and disclosure requirements

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the Exchange Act. Section 15(d) of the Exchange Actrequires registration when the issuer has filed a registrationstatement that has become effective pursuant to theSecurities Act. Registration under either Act will subjectthe issuer to the periodic reporting requirements and otherrequirements under the Exchange Act.Federal securities laws are intended to protect investors

by ensuring that adequate information is available to themprior to their making an investment decision. TheSecurities Act and the rules and regulations promulgatedunder the act set forth detailed disclosure requirementsapplicable to public offerings. Reporting issuers mustadhere to the disclosure requirements of the Exchange Actin relation to their periodic filings. Disclosures requiredpursuant to the Securities Act, which relate to specificofferings, are integrated with those required under theExchange Act. For foreign private issuers, the SEC hasprovided a separate integrated disclosure system, whichprovides a number of accommodations for foreignpractices and policies.

What is a foreign private issuer?The US federal securities laws define a foreign issuer as anyissuer that is a foreign government, a foreign national ofany foreign country, or a corporation or other organisationincorporated or organised under the laws of any foreigncountry.1 A foreign private issuer (FPI) is any issuer (otherthan a foreign government) incorporated or organisedunder the laws of a jurisdiction outside of the US, unlessmore than 50% of the issuer’s outstanding voting securitiesare held directly or indirectly by US residents, and any ofthe following applies: (1) the majority of the issuer’sexecutive offices or directors are US citizens or residents;(2) the majority of the issuer’s assets are located in the US;or (3) the issuer’s business is principally administered inthe US.2 A foreign company that obtains FPI status canavail itself of the benefits of this status immediately. Formore information regarding the determination of FPIstatus, see Chapter 9 (Exchange Act registration).Current SEC rules ease the disclosure burdens imposed

upon FPIs and reduce the ongoing costs of securitiesreporting obligations. Below we list some of the mainbenefits available to FPIs:• Annual report filing. Foreign private issuers are requiredto file annual reports on Form 20-F within four monthsof the issuer’s fiscal year-end.3 In contrast, US domesticissuers generally must file their annual reports on Form10-K within 60 to 90 days following the end of theirfiscal year.4

• Quarterly financial reports. An FPI has no legal obligationto file quarterly reports. By contrast, US domestic issuers

must file a quarterly report on Form 10-Q. An FPI maychoose to furnish quarterly financial information on avoluntary basis under cover of Form 6-K.

• Proxy solicitation statements.Unlike a US domestic issuer,an FPI has no legal obligation to file proxy solicitationmaterials on Schedule 14A or 14C in connection withannual or special meetings of its security holders.5

• Audit committee. An FPI also has no legal obligation toestablish an audit committee. However, in the absence ofsuch a committee, for certain US federal securities lawpurposes, issuer’s entire board of directors may act as theaudit committee.6

• Internal control reporting. An FPI only has to fileannually regarding its financial reporting internalcontrols while a US domestic issuer must do so on aquarterly basis.7

• Executive compensation. An FPI is exempt from theSEC’s disclosure rules for executive compensation on anindividual basis, but is required to provide certaininformation on an aggregate basis. In addition,individual management contracts and compensatoryplans must be filed as exhibits unless the issuer’s homecountry does not require such filings to be made and arenot otherwise publicly disclosed by the issuer.8

• Directors/officers, equity holdings. Directors and officersof an FPI (in other words, insiders) do not have to reporttheir equity holdings and transactions in such holdingsunder section 16 of the Exchange Act (Forms 3 and 4).9

However, some directors and officers may have to reporttheir holdings under section 13 of the Exchange Act, ifapplicable, and a FPI must provide share ownershipinformation regarding directors and officers as of themost recent practicable date in its annual report onForm 20-F and in other filings.

• IFRS – No US GAAP reconciliation. An FPI may prepareits financial statements in accordance with InternationalFinancial Reporting Standards (IFRS) as issued by theInternational Accounting Standards Board withoutreconciliation to US generally accepted accountingprinciples (US GAAP). In addition, an FPI using theIFRS standard is only required to file two years offinancial statements for its first reporting year, ratherthan the previously required three years.

• Exiting the reporting system. Rule 12h-6 under theExchange Act allows a US-listed FPI to exit the UScapital markets with relative ease and terminate theregistration of a class of securities under section 12(g) ofthe Exchange Act or terminate its reporting duties undersection 15(d) of the Exchange Act. An FPI mayterminate its registration or reporting duties with respectto a class of equity securities after certifying that:



• The FPI has had reporting obligations undersections 13(a) or Section 15(d) for at least the last 12months, has filed or furnished all reports required forthat period, and has filed at least one annual report;

• The FPI’s securities have not been sold in the US ina registered offering under the Securities Act duringthe last 12 months other than certain exceptions;

• The FPI has maintained a listing of the subject classof securities for at least the last 12 months on one ormore exchanges in a foreign jurisdiction, whichconstitutes the primary trading market for thosesecurities; and

• The average daily trading volume of the subjectclass of securities in the US has been no greaterthan five percent of its worldwide average dailytrading volume of the securities for the most recent12-month period, or on a date within the last 120days, the subject class of securities is either held ofrecord by fewer than 300 persons on a worldwidebasis or fewer than 300 persons resident in the US.

An FPI may terminate its registration or reporting dutieswith respect to a class of debt securities after certifyingthat:

• The FPI has had reporting obligations undersections 13(a) or 15(d) for at least the last 12months, has filed or furnished all reports required forthat period, and has filed at least one annual report;or

• On a date within the last 120 days, the subject classof securities is either held of record by fewer than300 persons on a worldwide basis or fewer than 300persons resident in the US.

• Exchange Act registration. Rule 12g3-2(b) under theExchange Act allows an FPI to exceed the registrationthresholds of section 12(g) of the Exchange Act andeffectively have its equity securities traded on a limitedbasis in the over-the-counter market in the US. Thismay be useful for FPIs that wish to accommodate alimited number of US investors without triggeringongoing registration and disclosure obligations. Rule12g3-2(b) under the Exchange Act automaticallyexempts an FPI from Exchange Act registrationrequirements and SEC reporting obligations if:• its primary trading market is in a foreign

jurisdiction;• it publishes, in English, the required disclosure

documents on its website or through a generallyavailable electronic information delivery system; and

• it does not otherwise have any section 13(a) or 15(d)Exchange Act reporting obligations.

Despite these important benefits, conducting a public

offering in the US, and becoming subject to ongoingregistration requirements is expensive. Foreign issuersconsidering whether to register their securities in the USunder the Securities Act or the Exchange Act also shouldconsider carefully the securities liabilities to which theyand their directors and officers and other control personsmay become subject. Similarly, issuers should consider thesecurities law liabilities to which they may become subjectin connection with offerings exempt from the USregistration requirements. As we discuss in this book, theseare considerably more limited.For more information regarding Exchange Act

registration and the reporting and disclosure obligations ofFPIs, see Chapter 9 (Exchange Act registration).

Exemptions from registrationGiven the onerous registration requirements applicable toissuers that register their securities with the SEC, manyissuers choose to access the US capital markets throughtargeted financings exempt from the registrationrequirements of the securities laws. Foreign bank holdingcompanies or foreign banks may avail themselves of theseexemptions to raise capital from US investors.A number of exemptions from the section 5 registration

requirements are available, based either on the type ofsecurity being offered and sold (described in section 3 ofthe Securities Act), or on the type of transaction in whichthe security is being offered and sold (described in section4 of the Securities Act), including the following: • Section 3(a)(2) of the Securities Act is an exemption fromregistration under the Securities Act available forsecurities issued or guaranteed by banks. A foreign bankmay rely on this exemption to offer its securities in theUS, guaranteed by its US branch or agency, or forsecurities issued by its US branch or agency. See Chapter6 (Section 3(a)(2) and considerations for foreign banksfinancing in the United States).

• Section 3(a)(3) of the Securities Act is an exemption fromthe registration requirements under the Securities Actfor short-term commercial paper with certaincharacteristics, provided the proceeds are used forcurrent transactions. See Chapter 8 (Considerationsrelated to commercial paper).

• Section 4(a)(2) of the Securities Act is an exemption fromregistration for transactions by an issuer not involvingany public offering, or private placements. Issuers willoften rely on the safe harbour provided by Regulation Dunder the Securities Act (Regulation D), which providesgreater certainty regarding the types of offerings thatwould be considered private placements. A foreign bankholding company may rely on section 4(a)(2) to issue



equity or debt securities to accredited or institutionalinvestors in the US. See Chapter 2 (Overview offinancing through exempt offerings).

• Rule 144A under the Securities Act is a safe harbouravailable for the resale of certain securities to qualifiedinstitutional buyers, or qualified institutional buyers(QIBs), by certain persons other than the issuer of thesecurities. See Chapter 2 (Overview of financingthrough exempt offerings).

• Regulation S under the Securities Act is an exclusion fromthe registration requirements of section 5 of theSecurities Act for offers and sales of securities outside theUnited States by both US and foreign issuers, which canbe used by foreign bank holding companies or foreignbanks in combination with a private placement or Rule144A offering to reach a broader universe of potentialinvestors. See Chapter 2 (Overview of financing throughexempt offerings).Foreign bank holding companies may issue and sell

equity, debt, hybrid (tier 1) or structured securities inreliance on section 4(a)(2) and Rule 144A, and may add aRegulation S component to an offering. Usually, foreignbank holding companies that do not want to list a class ofsecurities on a securities exchange in the US will issue non-voting preferred securities or debt securities. A foreignbank generally will rely on the section 3(a)(2) exemptionto offer its securities in the US, guaranteed by its USbranch or agency, or for securities issued by its US branchor agency. Foreign banks also may offer commercial paperin reliance on the section 3(a)(3) exemption.A foreign bank that anticipates that it will offer securities

regularly in the US may choose to establish a continuousissuance programme, like a medium-term note (MTN)programme, bank note programme or commercial paperprogramme, as opposed to relying on standalone offeringsof securities. An issuer will be able to realise certainefficiencies and improve its access to the capital markets byestablishing a programme. Foreign banks also may issueand offer covered bonds to US investors, either on astandalone basis, or through an issuance programme. Inaddition, foreign issuers may issue other instruments,which are not considered securities, including, forexample, certificates of deposit, to US investors. Theregistration requirements are not applicable to bankdeposits, or other instruments that are not consideredsecurities.In this book, we provide an overview of the exemptions

from registration that may be available to foreign bankholding companies or foreign banks that seek to access theUS capital markets. We also discuss the types of productsthat may be offered by foreign banks. Foreign banks may

offer various types of debt securities, including, but notlimited to, senior unsecured debt, senior secured debt (likecovered bonds), subordinated debt, structured debt (likeequity-linked, currency-linked, or commodity-linkednotes), hybrid debt intended to obtain favourableregulatory capital treatment, including contingent capital(CoCo) debt securities, and deposit liabilities. We alsodiscuss the entities that may offer such products, such asthe home offices or US branches of foreign banks or specialpurpose finance vehicles sponsored by foreign banks.

Tax considerations for foreign banksaccessing the US capital markets As will be discussed in the following chapters, a non-USfinancial institution has many options in terms of how itmay access the US capital markets. Depending on therange of entities at its disposal, it may choose to utilise aUS affiliate, a US branch or entirely offshore sources.Regulatory considerations certainly will play a significantrole in any choice of entity calculus (and may wellpredominate), but the tax consequences resulting from theidentity of the issuer also will feature prominently in thedecision matrix. These and other considerations will causeinstitutions to reach different conclusions on the questionof whether it is more advantageous to employ a US branchor a US subsidiary to issue a particular instrument in theUS capital markets. However, several aspects of the US taxanalysis are common to virtually all issuers and are worthyof note, particularly in light of dramatic changes to US taxlaw since 2017.10

Withholding taxesIt will be important to ensure that payments on the issuedinstruments can be made free of any applicablewithholding taxes to protect yields, maintaincompetitiveness and avoid any need for possible gross-uppayments. If the issuing entity is a US corporation and theholders will be exclusively US taxpayers, this typically willnot be an issue. However, if the issuer is the US branch ofan offshore entity, the question would be determined bythe law of the home jurisdiction of the parent entity (or,where applicable, by the provisions of a tax treaty betweenthat country and the US). Likewise, if the ultimateoffshore parent issues the instruments into the US market,the question of withholding tax ordinarily will bedetermined by the laws of the country of its tax residence.In any case, where non-US withholding tax is

implicated, it generally will be important to ensure that abroad exemption from the tax is available for theinstrument in question under the law of the relevantjurisdiction (as opposed to a treaty-based exemption that



looks to the residence of the holder of the instrument).This is necessary to ensure effective trading and freetransferability of the instruments.

Limits on the ability of US corporations to deductinterestPrior to 2018, the deductibility of a US corporation’s netinterest expense payable to a related non-US party in anytaxable year was generally limited only if (a) its debt:equityratio exceeded 1.5:1 and (b) its net interest expenseexceeded 50% of its adjusted taxable income (which wasroughly equivalent to EBITDA) for the year.11 Interestpayable to unrelated persons was not subject to any type offormulaic limitation. After the 2017 Act, the deductibilityof all interest expense of US corporations (whether paid toan unrelated party or to a related non-US or US person) islimited to an amount equal to 30% of adjusted taxableincome each year.12 After 2021, the definition of adjustedtaxable income will change to approximate EBIT (earningsreduced by depreciation and amortisation), which willcause a greater number of taxpayers to run afoul of theinterest limitation provision.The changes made by the 2017 Act may cause existing

multinational bank groups with US subsidiaries toconsider rebalancing the overall leverage of the group. Thisis because multinationals traditionally tended tooverweight their US entities with debt given the previouslyless-stringent deductibility rules in the US (as compared toother developed nations) and the higher US statutory taxrate. Given that both of these factors have changed withthe passage of the 2017 Act, a reexamination of worldwidedebt levels may now be appropriate.

Base erosion and anti-abuse tax (BEAT)The 2017 Act introduced a new US tax13 designed todiscourage corporate taxpayers from attempting to reducetheir tax base by making deductible payments to relatednon-US persons. Although the most common of thesepayments probably are interest and royalties, the provisionapplies to any type of deductible payment made to arelated non-US person, including payments for servicesand depreciation and amortization attributable to propertypurchased from a related non-US person. Only largecorporate taxpayers earning at least $500 million in grossreceipts (determined on a group-wide basis) and with abase erosion percentage of at least three percent14 arepotentially subject to the tax. A taxpayer’s base erosionpercentage is generally equal to the percentage of its totaldeductions that represent base erosion payments (that is,payments of a type described above that are made to arelated non-US person). The three percent threshold

required for a corporation to be potentially subject to theBEAT is reduced to two percent in the case of banks andregistered securities dealers (including corporate groupsthat have a bank or a registered securities dealer as amember). However, recently proposed Treasuryregulations15 would clarify that for this purpose a bankincludes only a US entity, so that a US branch of a non-US corporation would not be subject to the two percentbase erosion percentage rule.16

The BEAT is basically an alternative minimum taximposed at a 10% rate (five percent in 2018 and 12.5% in2026 and thereafter) on the income of a subject taxpayer,computed without the benefit of any base erosionpayments or the base erosion percentage of any netoperating loss deduction. The rate of tax is one percenthigher for any group that includes a bank.17

Several parties representing the banking industrysubmitted comments to Congress during the legislativeprocess, and to the Treasury Department after the 2017Act was passed into law, pointing out how the BEATimposed an unfair burden on foreign banks doing businessin the US. For example, it was noted that the fundsborrowed by US subsidiaries and branches from foreignparent banks essentially represent the cost of goods sold forUS lending operations that cannot be avoided andtherefore should not be subject to the BEAT. It was alsoobserved that the US Federal Reserve requires certain USaffiliates to borrow from their foreign parent entities tominimise the risk of insolvency. In such cases it wasthought to be inequitable to impose a tax law penalty forcompliance with a US Federal Reserve requirement.Finally, comments demonstrated how the BEAT wouldresult in amounts being taxed twice in many instances:Where the US branch of a foreign bank conducts businessin the US, it is subject to full US tax on the same basis justas if it were a US corporation. However, the BEAT statuterespects the branch’s foreign status and payments to it areconsidered base erosion payments. As a result, any USaffiliates of the US branch would be subject to the BEATeven though the US branch would be required to pay fullUS tax on the payments received from its US affiliates.The Proposed Regulations would correct certain of these

flaws. They contain a broad exception for banks makinginterest payments on their total loss-absorbing capital debt(TLAC) required by the US Federal Reserve.18 Thepreamble to the Proposed Regulations states: ‘The Treasury Department and the IRS have determined

that because of the special status of TLAC as part of a globalsystem to address bank solvency and the precise limits thatBoard regulations place on the terms of TLAC securities andstructure of intragroup funding, it is necessary and



appropriate to include an exception’ to the BEAT rules forTLAC payments. Thus the Treasury departmentconsidered both the fact that the payments are required bylaw and the apparently limited potential for their abuse indetermining that an exception to the BEAT wasappropriate. The preamble goes on to request commentson the question of whether ‘a similar exception for foreigncorporations that are required by law to issue a similar typeof loss-absorbing instrument’ should be written into theregulations.The Proposed Regulations also address the double

taxation problem described above, in which the relatedforeign person to whom a base-erosion payment is made issubject to US tax on the payment (for example, where aUS branch of an offshore bank receives payments from itsUS affiliates). Under the Proposed Regulations, thesepayments would be excluded from the definition of baseerosion payments where they are subject to US taxation inthe hands of the recipient.19 The preamble states: ‘The Treasury Department and the IRS have determined

that it is appropriate in defining a base erosion payment toconsider the US tax treatment of the foreign recipient [, and]that a payment to a foreign person should not be treated as abase erosion payment to the extent that payments to theforeign related party are effectively connected income [i.e., aresubject to US income tax on a net income basis as opposed toa gross withholding tax basis].’The Proposed Regulations do not provide for the broad

exemption from the BEAT for borrowings by US banksfrom foreign affiliates that had been requested by certainrepresentatives of the international banking industry.20

Some writers have suggested that in certain circumstances,the absence of appropriate exceptions could cause banks toturn to the capital markets to avoid the tax that couldotherwise result from borrowing from their offshoreparents. To the extent that the TLAC exception is notsufficient and the BEAT would otherwise impose asignificant cost, unrelated public borrowings (as opposedto related foreign financing) could represent a solution inappropriate circumstances, assuming that incrementaloverall costs do not outweigh the savings realised byavoiding the BEAT. Comments have been requested on the overall content

of the Proposed Regulations, which are expected to befinalised during the course of 2019. Final publication onthis timeline would enable any regulations to becomeretroactively effective for years after 2017.



ENDNOTES1. See Rule 405 under the Securities Act and Rule 3b-

4(b) under the Exchange Act.2. See Rule 405 under the Securities Act and Rule 3b-

4(c) under the Exchange Act.3. Form 20-F, General Instruction A.(b)(2).4. Form 10-K, General Instruction A.(2)(a)-(c).5. Rule 3a12-3(b) under the Exchange Act.6. Form 20-F Instruction to Item 6.C and SEC Release

No. 33-8220 (April 9 2003).7. SEC Release No. 33-8238 (June 5 2003).8. Item 6.B of Form 20-F.9. Rule 3a12-3(b) under the Exchange Act.10. The Tax Cuts and Jobs Act of 2017 (2017 Act), which

is generally effective for 2018 and later years, madesweeping changes to the US international taxationsystem (along with many other wide-rangingchanges).

11. Section 163(j) of the Internal Revenue Code of 1986,as amended, prior to amendment by the 2017 Act.(All section references in this Chapter are to sectionsof the Code, unless otherwise indicated.)

12. Businesses with average annual gross receipts of $25million or less are exempt from this annual limitation.

13. Section 59A (this provision is referred to as the baseerosion and anti-abuse tax or BEAT).

14.This threshold is reduced to two percent in certaincases, as discussed infra.

15. REG-104259-18 (IR-2018-250), December 13 2018(Proposed Regulations).

16. Prop. Reg. § 1.59A-1(b)(4); Code § 581.17. Similar to the base erosion percentage rules, the

proposed regulations would treat only US banks asbanks for purposes of the increased BEAT tax rate.

18. Prop. Reg. § 1.59A-3(b)(v).19. Prop. Reg. § 1.59A-3(b)(3)(iii).20. See Letter from Sarah A. Miller, (former) chief

executive officer of the Institute of InternationalBankers, to Hon. Kevin Brady, Chairman, HouseWays and Means Committee (December 7 2017).




Foreign issuers often find that they would like toaccess investors in the US without subjectingthemselves to the ongoing registration andreporting requirements applicable to public

companies in the US. As a result, many foreign issuersconsider offering securities to investors in the US inreliance on one of the exemptions from registration. In thischapter, we provide a brief overview of the mostcommonly relied upon exemptions.

Section 4(a)(2)Section 4(a)(2) provides that the section 5 registrationrequirements do not apply to transactions by an issuer notinvolving any public offering. This is often referred to asthe private placement exemption. The breadth of thisexemption makes it useful for issuers attempting toconduct a variety of financing transactions. The rationalefor this exemption from registration is that the extensiveregulation applicable to public offerings is not requiredwhen offerings are made by an issuer to a limited numberof offerees who can protect themselves. These exemptionsare available to US and non-US public and privatecompanies. In 1982, the SEC adopted Regulation D toprovide issuers with a safe harbour for conducting section4(a)(2) private placements.

Securities acquired pursuant to a section 4(a)(2) offeringmay be immediately resold under Rule 144A, even thoughthey are restricted securities, as defined in Rule 144(a)(3)under the Securities Act. The intent to resell under Rule144A is not inconsistent with section 4(a)(2) and does notaffect the availability of the exemption.

Regulation D provides issuers with two safe harbours forissuing securities without registration. The first, Rule 504,provides an exemption pursuant to section 3(b) of theSecurities Act for offerings of up to $5 million.1 Thesecond, Rule 506, which is the most popular, provides anexemption pursuant to section 4(a)(2) for limited offeringsand sales without regard to the dollar amount, but only to35 purchasers and an unlimited number of accreditedinvestors, who are typically institutional investors or highnet-worth individuals. Until recently, general solicitationwas not permitted in private placements in accordance

with Rule 506(b). However, in July 2013, pursuant tosection 201 of the Jumpstart Our Business Startups Act(112 P.L. 106) (JOBS Act), the SEC revised Rule 506 byadding a new exemption, Rule 506(c), which permitsgeneral solicitation if the issuer takes reasonable steps toverify that purchasers are accredited investors, allpurchasers are accredited investors, or the issuer reasonablybelieves that they are, immediately prior to the sale, and ifcertain other requirements are met. As part of theamendments, the SEC established four optional methodsthat would satisfy the accredited investor verificationrequirements. In addition, new disqualification provisionswere added to Rule 506, prohibiting the use of theexemption by certain bad actors and felons, whether or notgeneral solicitation is used.

Section 4(a)(2) private placements are attractive toforeign issuers considering offering securities in the USbecause they permit them to raise large amounts of capitalwithout the cost and delays of registration under theSecurities Act and SEC review of offering documents.Section 4(a)(2) private placements for foreign issuers arealmost always for debt securities, given that most foreignissuers want to avoid having too many US holders ofequity securities if the foreign issuers intend not to becomesubject to US reporting requirements.

Rule 144ARule 144A is a resale safe harbour exemption from theregistration requirements of section 5 of the Securities Actfor certain offers and sales of qualifying securities bycertain persons other than the issuer of the securities. Theexemption applies to resales of securities to QIBs (or toother purchasers that the initial purchasers and anypersons acting on their behalf reasonably believe to beQIBs). Issuers must find another exemption for the initialoffer and sale of unregistered securities, typically section4(a)(2) (often in reliance on Regulation D) or RegulationS. Resales to QIBs, which are large institutional investorswith securities portfolios in excess of $100 million, incompliance with Rule 144A are not public distributionsand, consequently, the reseller of the securities is not anunderwriter within the meaning of section 2(a)(11) of the

CHAPTER 2

Overview of financing through exempt offerings

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Securities Act. The securities eligible for resale under Rule144A are securities of US and foreign issuers that are notlisted on a US securities exchange or quoted on a USautomated inter-dealer quotation system.

There are four main conditions to reliance on Rule144A, including two procedural requirements (a noticeand information requirement). These requirements aresignificantly less burdensome than those associated with anSEC registered public offering.

Why should a foreign bank consider a Rule144A offering?Rule 144A permits issuers to raise large amounts of capitalwithout the cost and delay of registration under theSecurities Act and SEC review of the offering documents.In addition to these benefits, Rule 144A:• does not require extensive ongoing registration or

disclosure in the US;• provides a clear safe harbour for offerings to institutional

investors; and• provides greater liquidity for foreign issuers.

Rule 144A provides increased liquidity in several waysfor foreign issuers. A foreign issuer may avail itself ofRegulation S for offers and sales of securities outside theUS. Purchasers of such securities may then resell thesecurities to US persons (as defined in Regulation S) inreliance on Rule 144A. A foreign issuer may also sell itssecurities to a financial intermediary that acts as an initialpurchaser and immediately resells the securities to QIBs inreliance on Rule 144A. The availability of Rule 144A thusprovides greater liquidity for otherwise restricted securities.

How are Rule 144A transactions structured?The following types of transactions are often conducted inreliance on Rule 144A:• offerings of debt or preferred securities by public

companies;• offerings by foreign issuers that do not want to become

subject to US reporting requirements; and• offerings of common securities by non-reporting issuers

(in other words, private initial public offerings (IPOs)).Most Rule 144A offerings by FPIs that are not otherwise

US reporting companies are offerings of debt securities, inlarge measure because the issuer wants to avoid having aclass of equity securities held of record by 2,000 or morepersons or 500 or more persons who are not accreditedinvestors (as defined in Rule 501(a) under the SecuritiesAct), which could trigger the obligation to become a USreporting company. Such offerings may be conducted on astandalone basis or as a continuous offering programme.An issuer that intends to engage in multiple offerings may

have a Rule 144A programme or a Rule 144A/RegulationS programme. Rule 144A offerings often are structured asglobal offerings, with a side-by-side offering targeted atforeign holders in reliance on Regulation S. Doing sopermits an issuer to broaden its potential pool of investors.

Understanding Rule 144ARule 144A provides a non-exclusive safe harbour from theregistration and prospectus delivery requirements ofsection 5 of the Securities Act for certain offers and sales ofqualifying securities by certain persons other than theissuer of the securities. The safe harbour is based on twostatutory exemptions from registration under section 5,4(a)(1) and 4(a)(3) of the Securities Act. In summary, Rule144A provides that:• For sales made under Rule 144A by a reseller, other than

the issuer, an underwriter, or a broker-dealer, the reselleris deemed not to be engaged in a public distribution ofthose securities and, therefore, not to be an underwriterof those securities within the meaning of sections2(a)(11) and 4(a)(1) of the Securities Act.

• For sales made under Rule 144A by a reseller that is adealer, the dealer is deemed not to be a participant in adistribution of those securities within the meaning ofSection 4(a)(3)(C) of the Securities Act and not to be anunderwriter of those securities within the meaning ofsection 2(a)(11) of the Securities Act, and thosesecurities are deemed not to have been offered to thepublic within the meaning of section 4(a)(3)(A) of theSecurities Act.A Rule 144A offering usually is structured so that the

issuer first sells the newly-issued restricted securities to aninitial purchaser, typically a broker-dealer, in a privateplacement exempt from registration under section 4(a)(2)or Regulation D. Rule 144A then permits the broker-dealer to immediately resell the restricted securities toQIBs (or to purchasers that the broker-dealer and anypersons acting on its behalf reasonably to be QIBs).

In July 2013, pursuant to section 201 of the JOBS Act,the SEC revised Rule 144A to permit general solicitationand advertising of Rule 144A offerings, provided thatactual sales are only made to persons reasonably believed tobe QIBs. This revision was designed in part to address thecriticism that prior SEC rules were overly broad in limitingcommunications to QIBs. The amendments to Rule 144Atook effect on September 23 2013.

Rule 144A requirementsThere are four conditions to reliance on Rule 144A:• The resale is made only to a QIB (or to other purchasers

that the initial purchasers and any persons acting on



their behalf reasonably believe to be QIBs).• The securities resold: (a) when issued were not of the

same class as securities listed on a US national securitiesexchange or quoted on a US automated inter-dealerquotation system; and (b) are not securities of an open-end investment company, unit investment trust, orface-amount certificate company that is, or is required tobe, registered under the Investment Company Act of1940, as amended (Investment Company Act).

• The reseller (or any person acting on its behalf ) musttake reasonable steps to ensure that the buyer is awarethat the reseller may rely on Rule 144A in connectionwith the resale.

• Where securities of an issuer are involved that is neitheran Exchange Act reporting company, or a foreign issuerexempt from reporting pursuant to Rule 12g3-2(b)under the Exchange Act, or a foreign government, theholder and a prospective buyer designated by the holdermust have the right to obtain from the issuer and mustreceive, upon request, certain reasonably currentinformation about the issuer.

QIBsRule 144A identifies certain institutions that may beconsidered QIBs. In order to be considered a QIB, thefollowing entities must own and invest on a discretionarybasis at least $100 million in securities of non-affiliates: (1)insurance companies; (2) investment companies registeredunder the Investment Company Act or businessdevelopment companies, as defined in the InvestmentCompany Act; (3) licensed small business investmentcompanies; (4) certain pension plans, benefit plans andtrust funds; (5) business development companies, asdefined in the Investment Advisers Act of 1940, asamended; and (5) registered investment advisers. Banksand thrifts may be considered QIBs if they own and investon a discretionary basis at least $100 million in securitiesof non-affiliates and have an audited net worth of at least$25 million. Registered securities dealers need only ownand invest on a discretionary basis $10 million in securitiesof non-affiliates to be considered QIBs, and they mayexecute no-risk principal transactions for QIBs withoutregard to the amount owned and invested. Any entity ofwhich all of the equity owners are QIBs is deemed to be aQIB.

A seller must reasonably believe that the purchaser is aQIB. Rule 144A provides several non-exclusive alternativesfor ascertaining QIB status, including reliance on apurchaser’s annual financial statements, filings by thepurchaser with the SEC or another US or foreigngovernmental agency or self-regulatory organisation, or a

certification by an executive officer of the purchaser as tosatisfaction of the financial tests. Many financialintermediaries provide QIB questionnaires to theircustomers in order to pre-qualify them for offerings.

Eligible securitiesRule 144A is not available for transactions in: (1) securitiesthat, when issued, were of the same class as securities listedon a national securities exchange or quoted on anautomated interdealer quotation system (for example,Nasdaq); or (2) securities of an open-end investment trustor face amount certificate company (in other words, aninvestment company, such as a mutual fund). Preferredequity securities and debt securities commonly viewed asdifferent series generally will be viewed as different, non-fungible classes for purposes of Rule 144A. Convertible orexchangeable securities are treated as the underlyingsecurity unless subject to an effective conversion premiumof at least 10%. The SEC staff ’s position is that securitiesthat are convertible or exchangeable at the issuer’s optionare fungible if the underlying security is fungible,regardless of the effective conversion premium. Warrantsand options are treated as the underlying security unlessthe warrant or option has a term of at least three years andan effective exercise premium of at least 10%.

Notice requirementA seller and anyone acting on its behalf must takereasonable steps to ensure that the purchaser is aware thatthe seller may rely on the Rule 144A exemption. Thisrequirement is typically satisfied by placing a legend on thesecurity and including appropriate statements in theoffering memorandum for the securities.

Information requirements for non-reportingissuersIn order for the Rule 144A safe harbour to be available, ifthe issuer is not: (1) a reporting company under theExchange Act; (2) a foreign company exempt fromreporting under Rule 12g3-2(b) under the Exchange Act;or (3) a foreign government, then the holder of thesecurities and any prospective purchaser designated by theholder has the right to obtain from the issuer, upon theholder’s request, the following information:• a brief description of the issuer’s business, products, and

services;• the issuer’s most recent balance sheet, profit and loss

statement, and retained earnings statement; and• similar financial statements for the two preceding fiscal

years.This obligation to provide information pursuant to Rule



144A continues so long as the issuer is neither a reportingcompany nor a foreign issuer providing home countryinformation under the Rule 12g3-2(b) exemption. In someRule 144A offerings, especially debt offerings, the issuermay agree, in the indenture or other operative document,to provide disclosure similar to public company disclosurefor as long as the security is outstanding. An FPI exemptfrom reporting pursuant to Rule 12g3-2(b) under theExchange Act will satisfy the reasonably currentinformation requirement by continuing to publish thespecified Rule 12g3-2(b) information in English on itswebsite in accordance with the requirements of the issuer’shome country or principal trading markets.2

A foreign issuer exempt from reporting under Rule12g3-2(b) under the Exchange Act is not subject to theinformation requirements under Rule 144A. Rule 12g3-2(b) under the Exchange Act exempts from registrationunder the Exchange Act most non-US companies that arelisted in their home markets (but not on a US securitiesexchange) and that publish certain English languagefinancial and business information on their websites. Therule also allows non-US companies (even those with morethan 300 US shareholders) to benefit automatically froman exemption from Exchange Act reporting obligation. Asa result, it is easier for security holders to resell thesecurities of exempt foreign issuers to QIBs pursuant toRule 144A.

Rule 144A does not provide how the security holder’sright to obtain the required information must beestablished. However, the SEC has confirmed that such aright can be created in the terms of the security, bycontract, by operation of law or by the rules of a self-regulatory organisation.3

Restricted securities and resales by investorsSecurities acquired in a Rule 144A transaction arerestricted securities within the meaning of Rule 144(a)(3)under the Securities Act. As a result, these securities remainrestricted until the applicable holding period expires andmay only be publicly resold under Rule 144 under theSecurities Act (Rule 144), pursuant to an effectiveregistration statement, or in reliance on any other availableexemption under the Securities Act. Often, investors willnegotiate with the FPI to obtain resale registration rights inconnection with a Rule 144A offering. However, an FPIthat would like to avoid US reporting requirements willtypically not grant registration rights. Consequently, inorder to resell the securities, an investor either will need tohold the securities for a one-year holding period (assumingthe FPI is not a reporting company), or dribble thesecurities out in compliance with Rule 144, or resell the

securities pursuant to another exemption—includingselling to another QIB. Exempt resales of restrictedsecurities may be made in compliance with Rule 144Aitself, Regulation S, the section 4(a)(1½) exemption or thesection 4(a)(7) exemption.

Rule 144Rule 144 has been called the dribble-out rule since itpermits investors (often affiliates) to sell limited quantitiesof securities acquired in private transactions over aprotracted period of time. The SEC adopted amendmentsto Rule 144 in 2007 that, among other things, shortenedthe holding periods for restricted securities, making iteasier for Rule 144A securities to be acquired by non-QIBsonce the restricted period has expired.

For non-affiliate holders of restricted securities, Rule144 provides a safe harbour for the resale of such securitieswithout limitation after six months in the case of issuersthat are reporting companies that comply with the currentinformation requirements of Rule 144(c), and after oneyear in the case of non-reporting issuers, such as manyFPIs.4 In each case, after a one-year holding period, resalesof these securities by non-affiliates will no longer besubject to any other conditions under Rule 144.

For affiliate holders of restricted securities, Rule 144provides a safe harbour for permitting resales, subject tothe same six-month and one year holding periods for non-affiliates and to other resale conditions of Rule 144. Theseother resale conditions include, to the extent applicable:(a) adequate current public information about the issuer;(b) volume limitations; (c) manner of sale requirements forequity securities; and (d) notice filings on Form 144.

The section 4(a)(1½) exemptionThe section 4(a)(1½) exemption is a case law-derivedexemption that allows the resale of privately placedsecurities in a subsequent private placement.5 Thisexemption typically is relied on in connection with theresale of restricted securities to accredited investors whomake appropriate representations. Generally, if anaccredited investor cannot qualify as a QIB under Rule144A, the seller will seek to use the section 4(a)(1½)exemption for secondary sales of privately-held securities.Section 4(a)(1½) also is sometimes used to extend a Rule144A offering to institutional accredited investors.

The section 4(a)(7) exemptionSection 4(a)(7) became effective immediately after theFixing America’s Surface Transportation Act was signedinto law on December 4 2015. Section 4(a)(7) provides aresale exemption for certain transactions involving



unregistered resales and partially resembles the section4(a)(1½) exemption for private resales of restrictedsecurities, although it is more limited in scope. The section4(a)(7) resale exemption requires, among other things, that(1) each purchaser is an accredited investor, (2) neither theseller nor any person acting on the seller’s behalf engages inany form of general solicitation and (3) in the case of anissuer that is not a reporting company, exempt from thereporting requirements pursuant to Rule 12g3-2(b) underthe Exchange Act, or a foreign government eligible toregister securities on Schedule B, at the request of theseller, the seller and a prospective purchaser obtain fromthe issuer reasonably current information.

Regulation SRegulation S represents the SEC’s position that securitiesoffered and sold outside of the US need not be registeredwith the SEC and specifies two safe harbours, an issuer safeharbour (Rule 903) and a resale safe harbour (Rule 904).These provide that offers and sales made in compliancewith certain requirements are deemed to have occurredoutside the US and are, therefore, excluded from theapplication of Section 5. Regulation S is attractive forforeign issuers that may have operations in the US or whochoose to do a global offering because they can rely on theRegulation S minimum jurisdictional contacts concept forreasonable assurance that they will not inadvertentlybecome subject to federal securities laws merely because ofa Regulation S tranche. Additionally, the Regulation Sresale safe harbour provides a means for non-US employeesof foreign companies to resell company securities acquiredthrough their employee benefit plans.

What types of Regulation S offerings may aforeign issuer consider?There are several types of Regulation S offerings that US orforeign issuers may conduct:• a standalone Regulation S offering, in which the issuer

conducts an offering of debt or equity securities solely inone or more non-US countries;

• a combined Regulation S offering outside the US andRule 144A offering inside the US, which, from the USperspective, is more common and usually involves debtsecurities; and

• Regulation S continuous offering programmes for debtsecurities, including various types of MTN programmes;these programmes may be combined with an issuance ofsecurities to QIBs (or to other purchasers that the initialpurchasers and any persons acting on their behalfreasonably believe to be QIBs) in the US under Rule 144A.Accordingly, issuers may use Regulation S alone as well

as in combination with other offerings. A Regulation S-compliant offering can be combined with a registeredpublic offering in the US or an offering exempt fromregistration in the US, such as a Rule 144A offering, aswell as be structured as a public or private offering in oneor more non-US jurisdictions.

Understanding Regulation SRegulation S, which is comprised of Rules 901 to 905under the Securities Act) is available only for offers andsales of securities outside the US made in good faith andnot as a means of circumventing the registration provisionsof the Securities Act. The below parties may rely onRegulation S:• Offering participants, including:

• US issuers – both reporting and non-reportingissuers may rely on the Rule 901 general statementor the Rule 903 issuer safe harbour;

• foreign issuers – both reporting and non-reportingforeign issuers may rely on the Rule 901 generalstatement or the Rule 903 issuer safe harbour;

• distributors (underwriters and broker-dealers) –both US and foreign financial intermediaries mayrely on the Rule 901 general statement or the Rule903 issuer safe harbour;

• affiliates of the issuer – both US and foreign; or• any persons acting on the behalf of the

aforementioned persons;• Non-US resident purchasers (including dealers) who are

not offering participants may rely on the Rule 901 generalstatement or the Rule 904 resale safe harbour to transfersecurities purchased in a Regulation S offering; and

• US residents (including dealers) who are not offeringparticipants may rely on the Rule 901 general statementor the Rule 904 resale safe harbours in connection withpurchases of securities on the trading floor of anestablished foreign securities exchange that is locatedoutside the US or through the facilities of a designatedoffshore securities market.

Regulation S requirementsThe availability of the issuer and the resale safe harbours iscontingent on two general conditions:• The offer or sale must be made in an offshore

transaction.• No directed selling efforts may be made by the issuer, a

distributor, any of their respective affiliates, or anyperson acting on their behalf.Regulation S provides that any offer, sale, and resale is

part of an offshore transaction if:6

• No offer is made to a person in the US.



• Either: (1) at the time the buy order is originated, thebuyer is (or is reasonably believed to be by the seller)physically outside the United States; or (2) thetransaction is for purposes of Rule 903, executed on aphysical trading floor of an established foreign securitiesexchange, or for purposes of Rule 904, executed on adesignated offshore securities market and the seller is notaware that the transaction has been pre-arranged with aUS purchaser.A buyer is generally deemed to be outside the US if they

(as opposed to the buyer’s agent) are physically locatedoutside the US. However, if the buyer is a corporation orinvestment company, the buyer is deemed to be outsidethe US when an authorised agent places the buy orderwhile physically situated outside the US. In addition,offers and sales of securities made to persons excluded fromthe definition of US person, even if physically present inthe US, are deemed to be made in offshore transactions.

Directed selling effortsDirected selling efforts is defined by Regulation S as anyactivity undertaken for the purpose of, or that could bereasonably expected to result in, conditioning the USmarket for the relevant securities.7 This applies during theoffering period as well as during the distributioncompliance period. Violation of the prohibition againstdirected selling efforts precludes reliance on the safeharbour.

Additional restrictionsOfferings made in reliance on Rule 903 are subject toadditional restrictions that are calibrated to the level of riskthat securities in a particular type of transaction will flowback into the US. Rule 903 distinguishes three categoriesof transactions based on: (1) the type of securities beingoffered and sold; (2) whether the issuer is domestic orforeign; (3) whether the issuer is a reporting issuer underthe Exchange Act; and (4) whether there is a substantialUS market interest.• Category 1 transactions are those in which the securities

are least likely to flow back into the US. Therefore, theonly restrictions on such transactions are that they mustbe offshore transactions and that there be no directedselling efforts in the US.

• Categories 2 and 3 transactions are subject to anincreasing number of offering and transactionalrestrictions for the duration of the applicabledistribution compliance period.Distribution compliance period is defined in Regulation

S8 generally as the period following the offering when anyoffer or sales of Category 2 or 3 securities must be made in

compliance with the requirements of Regulation S toprevent the flow back of the offered securities into the US.The period ranges from 40 days to six months forreporting issuers or one year for equity securities of non-reporting issuers.

Resale limitations and transfer restrictionsIn terms of liquidity, an FPI should carefully consider thetransfer restrictions that are imposed on securities soldpursuant to Regulation S. Securities cannot be offered orsold to a US person during the distribution complianceperiod unless the transaction is registered under theSecurities Act or exempt from registration. The relevantdistribution compliance periods in connection withsecurities sold in Categories 1, 2 and 3 offerings,respectively, are set forth above. The distributioncompliance period begins on the later of: (1) the date whenthe securities were first offered to persons other thandistributors; or (2) the date of the closing of the offering,and continues until the end of the time period specified inthe relevant provision of Rule 903.9

Rule 144A/Regulation SAn FPI that would like to offer its securities to USinstitutional investors may not be able to accomplish thisobjective if it were to structure a financing transactionsolely as a Regulation S offering. Rule 144A offerings areoften structured as global offerings, with a side-by-sideoffering targeted at foreign holders in reliance onRegulation S. This dual structure permits an issuer tobroaden its potential pool of investors. The issuer may sellto an initial purchaser outside the US in reliance onRegulation S, even if the initial purchaser contemplatesimmediate resales to QIBs in the US.

Compliance with both Rule 144A andRegulation SIn a global offering, the Rule 144A portion must complywith the Rule 144A requirements. Similarly, the offering ofthe Regulation S portion must comply with Regulation Sdiscussed above. It should be emphasised that theRegulation S portion of any offering refers only to theportion of the offering that requires the offeringparticipants to comply with Regulation S to benefit fromthe safe harbour. The offering itself must also comply withthe requirements of applicable non-US jurisdictions andthe requirements of any foreign securities exchange orother listing authority.

As we have seen, an issuer may rely on both Rule 144Aand Regulation S. For example, an issuer may sell theirsecurities in a private placement to an initial purchaser that



will rely on Rule 144A for resales and contemporaneouslyoffer their securities offshore in reliance on Regulation S.Although Regulation S imposes a distribution complianceperiod during which time purchasers cannot resell theirsecurities to US persons, Rule 144A provides a non-exclusive safe harbour for resales of Regulation S securities.US broker-dealers may purchase unregistered securitiesoffered outside the US under Regulation S and resell themin the US to QIBs pursuant to Rule 144A during thedistribution compliance period.10 In addition, a QIB thatacquired securities in a Rule 144A transaction can rely onRegulation S to resell the securities to any purchaser in anoffshore transaction, provided such resales do not involveany US-directed selling efforts.

In its adopting release for the revised Rule 144A, theSEC confirmed its view that concurrent offshore offeringsthat are conducted in compliance with Regulation S willnot be integrated with domestic unregistered offerings thatare conducted in compliance with Rule 506 of RegulationD or Rule 144A11 (i.e. general solicitation in a Rule 144Aoffering will not automatically constitute directed sellingefforts in respect of a related Regulation S offering).Therefore, engaging in a solicitation in the US inconnection with a Rule 144A offering will not result in aloss of the Regulation S exemption. However, the generalsolicitation must still be analysed to ensure that it does notconstitute directed selling efforts under Regulation S.12

Exempt securitiesThe prior discussions focus on transactions that are exemptfrom the registration requirements of section 5 of theSecurities Act. The Securities Act also provides exemptionsfrom the registration requirements for certain types ofinstruments. These exemptions are contained in section 3of the Securities Act. There are exemptions under section3 for securities issued by certain types of entities. Forexample, there are exemptions available for securitiesissued by, among others: certain governmental entities,including municipalities; by certain not for profitorganisations under Rule 501(c)(3) under the InternalRevenue Code of 1986, as amended; and for banks. Inaddition, there are exemptions available for certain types ofinstruments.

Section 3(a)(2)Section 3(a)(2) exempts from registration under theSecurities Act any security issued or guaranteed by a bank.This exemption is based on the notion that, whetherchartered under state or federal law, banks are highly andrelatively uniformly regulated, and as a result will provideadequate disclosure to investors about their business and

operations in the absence of federal securities registrationrequirements. In addition, banks are also subject to variouscapital requirements that may help increase the likelihoodthat holders of their debt securities will receive timelyprincipal and interest payments. Commercial paperbacked by letters of credit of domestic banks are exemptunder section 3(a)(2). The SEC view is that letters ofcredit, in effect, are guarantees, and the commercial paperthey support are therefore exempt as securities guaranteedby a bank.13

Section 3(a)(3)Most commercial paper is issued in reliance on section3(a)(3), which exempts from the registration andprospectus delivery requirements ‘any note, draft, bill ofexchange, or banker’s acceptance which arises out of acurrent transaction or the proceeds of which have been orare to be used for current transactions, and which has amaturity at the time of issuance of not exceeding ninemonths, exclusive of days of grace, or any renewal thereofthe maturity of which is likewise limited.’14 Thisexemption, like that for bank securities, is not transaction-based.

The SEC has construed section 3(a)(3) to apply only to‘prime quality negotiable commercial paper of a type notordinarily purchased by the general public, that is, paperissued to facilitate well-recognized types of currentoperational business requirements and of a type eligible fordiscounting by US Federal Reserve banks’.15 In Release No.33-4412, the SEC stated that negotiable notes that hadbeen issued, or the proceeds of which will be used in

‘producing, purchasing, carrying or marketinggoods or in meeting current operating expenses of acommercial, agricultural or industrial business, andwhich is not to be used for permanent for fixedinvestment, such as land, buildings, or machinery, norfor speculative transactions or transactions insecurities (except direct obligations of the UnitedStates government)’are eligible for discounting under the regulations of the

board of governors of the US Federal Reserve System.16

Although the SEC no longer requires that commercialpaper be eligible for discounting, the rest of this statementhas been construed to mean that the commercial papermust be used for current transactions.

The current transaction requirement is not satisfiedwhere the proceeds of the commercial paper are used to:(1) discharge existing debt (unless the existing debt is alsoexempt under section 3(a)(3)); (2) purchase or construct aplant; (3) purchase durable machinery or equipment; (4)fund commercial real estate development or financing; (5)



purchase real estate mortgages or other securities; (6)finance mobile homes or home improvements; or (7)purchase or establish a business enterprise.17

The SEC has established through several no-actionletters18 that an issuer is not required to trace the proceedsof issued commercial paper into identifiable currenttransactions. Instead, as long as the amount of outstandingcommercial paper at any time is not greater than theamount of current transactions eligible to be financed (thecommercial paper capacity), the current transactionrequirement will be deemed satisfied. The SEC’s divisionof corporation finance has stated that an issuer should usea balance sheet test for determining commercial papercapacity.19 This test involves determining the capital anissuer has committed to current assets and the expenses ofoperating its business over the preceding 12-monthperiod.20



ENDNOTES1. In October 2016, the SEC adopted final rules that,

among other things, (1) amended Rule 504 to (a)increase the aggregate amount of securities that maybe offered and sold in any 12-month period from $1million to $5 million and (b) disqualify certain badactors from participating in Rule 504 offerings, and(2) repealed Rule 505 of Regulation D, which hadprovided a safe harbour from registration for securitiesoffered and sold in any twelve-month period from $1million to $5 million. The repeal of Rule 505 tookeffect on May 20 2017.

2. Rule 144A(d)(4)(ii)(C) under the Securities Act. Seealso Rule 12g3-2(b) under the Exchange Act.

3. Securities Act Release No. 33-6862, 46 S.E.C. Docket26 (April 23 1990).

4. For a non-reporting issuer, compliance with theadequate current public information conditionrequires the public availability of basic informationabout the issuer, including certain financialstatements.

5. The seminal case involving the so-called section4(a)(1½) exemption was the Second Circuit Court ofAppeals decision in Gilligan, Will & Co. v. SEC, 267F.2d 461 (2d Cir. 1959).

6. Rule 902(h).7. Rule 902(c).8. Rule 902(f ).9. Id.10. See Rules 144(a)(3)(iii) and 144A(b)–(c) under the

Securities Act; Preliminary Note 2 to Rule 144A;Preliminary Note 5 to Regulation S; Securities ActRelease No. 33-7505, 66 S.E.C. Docket 1069(February 17 1998); Securities Act Release No. 33-6863, 46 S.E.C. Docket 52 (April 24 1990).

11. Securities Act Release No. 33-9415 at 57 (July 102013).

12. SEC Compliance and Disclosure Interpretation(C&DI) Rule 144A 138.04 (November 13 2013).

13. See Chapter 6 (Section 3(a)(2) and considerations forforeign banks financing in the United States).

14. Section 3(a)(3) of the Securities Act, 15 USC. §77c(a)(3) (2009).

15. Securities Act Release No. 33-4412 (September 201961).

16. Id.17. Id.18. Westinghouse Credit Corporation, SEC No-Action

Letter, 1986 WL 66748 (May 5 1986); LyondellPetrochemical Co., SEC No-Action Letter, 1989 WL246100 (July 19 1989).

19. Id.; C&DI Securities Act Sections 219.02 (November26 2008).

20. See Chapter 8 (Considerations relating to commercialpaper).



OverviewA financial institution issuer with regular funding needsmay want to maximise its capital raising opportunities byestablishing a continuous issuance programme. Acontinuous issuance programme enables an issuer to offersecurities at any time, from time to time, over the term ofthe programme, with a reduced amount of documentationrequired for each issuance. Many foreign issuers mayalready be familiar with, or have established, globalmedium-term note (MTN) programmes, euro MTNprogrammes or commercial paper programmes. Theseprogrammes permit the issuer to offer debt securities (inthe case of an MTN programme) or short-term debt (inthe case of a commercial paper programme) regularly inresponse to inquiries from investors (reverse inquirytransactions) or in transactions initiated by the issuer to orthrough a financial intermediary that acts on an agency orprincipal basis. An issuer may also establish a continuousoffering programme pursuant to which it sells other typesof securities, including structured products or coveredbonds. A foreign issuer may want to consider setting up acontinuous issuance programme that permits it to offersecurities to US investors.

Medium-term note programmesAn MTN programme enables an issuer to offer a variety ofdebt securities on a regular or continuous basis, in astreamlined manner. Traditionally, issuers have used theirMTN programmes to fill the financing gap between short-term commercial paper, which has a maturity of ninemonths or less, and long-term debt, which has a maturityof five to seven years or more. Although MTNs typicallyhave maturities of between two and five years, they are notrequired to have any particular tenor. An issuer may specifythe overall amount of debt it will offer from its MTNprogramme. The issuer will typically work with its arrangerto determine an appropriate size for the programme.An MTN programme relies on a master set of disclosure

documents, agreements with dealers, and issuing andpaying agency agreements to help minimise the newdocumentation (and associated costs) required for eachoffering of notes. This approach enables an issuer to

complete each issuance quickly and efficiently. If an MTNprogramme is conducted as a private placement, the issuergenerally relies on the exemptions from registrationafforded by section 4(a)(2) of the Securities Act,Regulation D, Rule 144A, Regulation S or a combinationthereof. An issuer may have more than one MTNprogramme, and may use each programme to target aspecific market. For example, an issuer may have a Rule144A MTN programme to access the debt markets in theUnited States on a private basis as well as a bank noteprogramme (at the bank level), that is exempt fromregistration under section 3(a)(2).

MTN programme structuresRule 144A programmesAs discussed in Chapter 1, Rule 144A is a resale safeharbour exemption from the registration requirements ofsection 5 of the Securities Act for certain offers and sales ofqualifying securities by certain persons other than theissuer. The exemption applies to resales of securities toQIBs. Rule 144A permits persons other than the issuer toresell, in a transaction not involving a public offering,restricted securities. Typically, a financial intermediary,such as an investment bank, facilitates the resale ofsecurities in a Rule 144A offering. The sale of the securitiesto the initial purchaser is conducted pursuant to theexemption from registration under section 4(a)(2).

Bank note programmesA bank issuer may choose to structure its MTN programmeas a bank note programme. These programmes are similar toother types of MTN programmes, except that the securitiesof banks are exempt from registration pursuant to section3(a)(2). Instead of relying on a transactional exemptionfrom registration, these programmes rely on a securities-based exemption. However, unlike other issuers, banks aresubject to regulation (that is, by the Office of theComptroller of the Currency, if a national bank or a federalbranch of a non-US bank; or by individual state regulators,if a state bank). These regulators may subject bank issuers tooffering restrictions and limitations that may not apply toother issuers.1


CHAPTER 3

Overview of continuous issuance programmes


Posting and settlementIssuances of notes under an MTN programme settledifferently than underwritten offerings of notes issued ona stand-alone basis. Through programme dealers, an issuerof MTNs typically posts offering rates over a range ofpossible maturities: for example, nine months to one year;one year to 18 months; 18 months to two years; andannually thereafter. An issuer may post rates as a yieldspread over US Treasury securities having the same or asimilar maturity. The dealers provide this rate informationto investors or to other dealers. When an investor expressesinterest in an MTN offering, the dealer contacts the issuerto obtain a confirmation of the terms of the transaction.Within a range, the investor may have the option ofselecting the actual maturity of the notes, subject to finalagreement with the issuer. DTC, Euroclear, Clearstreamand other international clearing agencies have establishedprocedures for the deposit of global securities and thetransfers of interests within each of the securities andbetween the securities held by each of them, subject tocompliance with applicable legal requirements.

Arranger and dealersAn issuer looking to establish an MTN programme willengage an investment bank to assist with that process. Anissuer also might engage additional investment banks toserve as dealers (or selling agents) under the programme.An arranger for an MTN programme performs many ofthe same functions as a lead underwriter in a traditional,public underwritten offering. The arranger assists theissuer in establishing the programme, advising on the formand content of the offering documents, including the sizeof the programme and the types of securities that may beoffered under the programme. The arranger also assists indrafting the offering documents and related programmeagreements. As part of the drafting process, the arrangernegotiates the terms of the programme documents,including the distribution or programme agreement, on itsown behalf and on behalf of the other dealers named in theprogramme.In addition, the arranger also serves an advisory role with

respect to the MTN programme. It advises the issuer ofpotential financing opportunities and communicates tothe issuer any offers from potential investors. For eachissuance, the arranger will coordinate the offering, servingas principal dealer for the programme. The arranger alsocoordinates settlement of the MTN issuances with theissuer and the paying agent. Lastly, the arranger typicallymakes a market in the securities issued under theprogramme (ensuring greater liquidity for investors).However, an arranger has no obligation to purchase any

securities issued under the programme. An arranger mayparticipate in a particular takedown, but has no obligationto do so.

Programme dealersAt the time a programme is established, the issuer willselect both an arranger and a number of other investmentbanks to serve as dealers. Dealers engaged at the start of theprogramme typically are named in the offering materials asdealers. The dealers for an MTN programme act as sellingagents for the programme, and are responsible for placingthe securities sold under the programme. The dealers, likethe arranger, often make a market in the issuer’s securities.Issuers frequently engage multiple dealers, because anincrease in dealer price quotations may lead to morereverse enquiry transactions.Because an issuer’s needs may change, and because the

value of an MTN programme lies in its flexibility, theagreement may also contain the procedures for adding newdealers, either for a particular tranche or for the MTNprogramme as a whole. These procedures typically includea requirement that the new dealer delivers an accessionletter or a similar agreement in which it becomes a party tothe programme agreement, and agrees to perform andcomply with all of the duties and obligations of a dealerunder the programme agreement. The issuer then sends aletter to the dealer (or countersigns the dealer’s letter)confirming its appointment to the programme.The issuer may appoint one or more new dealers for a

particular tranche. The procedures to become a dealer fora particular note issue include a requirement that the newdealer delivers an accession letter or a similar agreement inwhich it becomes a party to the programme agreement,agrees to perform and comply with all of the duties andobligations of a dealer, with respect to that issue of notes,under the programme agreement. The issuer then sends aletter to the dealer (or countersigns the dealer’s letter)confirming its appointment, solely with respect to thatissue of notes, as a dealer under the programme agreement.

Due diligence concernsBecause takedowns from an MTN programme may befrequent, and often occur on short notice, the dealers arenot likely to be able to initiate and complete a full duediligence review at the time of each offering. In order toaccommodate these timing considerations, the issuer andthe dealers should establish an ongoing due diligencereview process. The dealers (coordinated by the arranger)and their counsel will periodically, at least once a quarter(if not more often) update their prior due diligence. Thiswill ensure that their review is up-to-date at the time of



each takedown. To facilitate this process, the issuer willdesignate, under the MTN programme, a law firm(designated dealers’ counsel) to represent the dealers andconduct ongoing legal due diligence on their behalf. If thedealers relied on different counsel for each issuance, itwould be difficult to complete takedowns quickly.

DocumentationAn MTN programme makes use of a standard, or master,set of documents that are agreed when the programme isestablished. The programme then relies on a streamlinedset of documents for each particular issuance. For eachtype of MTN programme, these documents have anumber of common features.

DisclosureMarket practice is to include substantial disclosure aboutthe issuer (or its parent), although generally less than thatrequired for a registered offering (for instance, for afinancial institution, unregistered programmes may notinclude the SEC’s Industry Guide 3 disclosure). Issuersand arrangers rely on the SEC disclosure rules inRegulations S-K and S-X as a guide. In addition, thenature of the issuer’s business and its credit ratings mayinfluence the level of disclosure.

Offering memorandumThe primary disclosure document is referred to as anoffering memorandum or an offering circular. The offeringmemorandum contains: (1) information about the issuerand its business (or incorporates this information byreference from other documents); and (2) informationabout the securities that will be offered under theprogramme and the manner in which the securities will bedistributed. If the offering is conducted under Rule 144A,the offering memorandum must include a legend regardingre-sale and transfer restrictions applicable to Rule 144Aofferings. In addition, the offering memorandum oftenstates that the issuer is available to respond to questions andprovide additional documents (to the extent it can do sowithout unreasonable effort or expense).The offering memorandum will provide investors with a

brief discussion of the issuer and its business. If the issueris a foreign issuer, the financial statements it prepares in itshome country may be incorporated by reference. If theoffering memorandum will be used for offerings to USinvestors, the financial statements are typically compliantwith US GAAP or IFRS. If the offering memorandumcontains non-US GAAP financial statements,consideration should be given to including a reconciliationfootnote explaining the differences between the non-US

GAAP numbers and US GAAP equivalents. Risk factorsincluded in the offering memorandum may be limited inscope and focus on risks relating to the notes, includingparticular risks surrounding the various structured notesincluded in the programme, risks associated with thetransfer restrictions on the notes (as discussed above), risksrelated to the anticipated uses of proceeds, and any newbusiness risks. If the issuer does not file Exchange Actreports containing its business and industry risks, the riskfactors may be more fulsome.The offering memorandum will describe the general

terms of the notes applicable to all series of notes, or tocertain types of notes in a section usually referred to as the‘description of the notes’. This section will describe thevarious types of notes to be offered under the programme— fixed rate notes, floating rate notes, equity-or credit-linked notes, or other types of structured notes. Thissection also contains all of the provisions that may beapplicable to the notes offered under the programme,including their ranking, any bail-in or similar features thatapply under relevant laws, where the notes may bepresented for payment and whether they may beredeemed, among others. An issuer may issue any type ofnote under its MTN programme, provided that the termsare generically described in this section (although it may bepossible to issue another type of note, if the issuer, dealersand counsel are comfortable with the disclosure, whichwould be significantly updated in the pricing supplement).The offering memorandum will contain a plan of

distribution section describing the manner in which thenotes will be sold and by whom. This section describes therelationship between the issuer and the dealers, andinforms investors that notes may be sold on a principal oragency basis, among other things. In addition, this sectionmay contain legends containing selling restrictions in thevarious jurisdictions in which the notes will be sold. It isimportant that the issuer and arranger discuss in advancethe relevant jurisdictions in which the issuer would like toissue notes, and the types of debt securities the issuerwould like to issue in each jurisdiction. By doing so, theparties can attempt to ensure that all the relevant sellingrestrictions are provided for in advance.The offering memorandum may also include a

discussion of the tax consequences of investing in thenotes, at least on a generic level. The tax discussion mayneed to be supplemented in connection with specificissuances of notes.

Pricing supplement/final termsPricing supplements are intended to supplement thedisclosure about the issuer and the notes contained in the



offering memorandum. The pricing supplement typically isused to disclose the specific terms of the series of securitiesand the manner in which they will be offered. In addition,from time to time, additional or updated information aboutthe issuer may be included in this document. An issuer mayuse a pricing supplement or a final term sheet to provideinvestors with the specific terms of the notes being issued.

Programme agreementA programme agreement (also referred to as a distributionagreement or a sales agency agreement) is a contract betweenthe issuer and the dealers. A programme agreement servesthe same purpose as an underwriting agreement for anunderwritten public offering, but is designed to apply tomultiple offerings, as opposed to a single offering, duringthe life of the programme. Each offering under theprogramme is governed by the programme agreement,eliminating the need to draft, negotiate and execute a newagreement at the time of each takedown.An administrative procedures memorandum is typically

attached as an exhibit to the programme agreement and/orthe fiscal and paying agency agreement. Thismemorandum details the procedures for offering notesunder the programme, including the exchange ofinformation, settlement procedures, and responsibility forpreparing documents (among the issuer, the dealers, thepaying agent, and the applicable clearing system) for eachissuance under the programme. Although counsel draftsthis document, it is critical that it be reviewed by the issuer,the dealers, and the fiscal and paying agent’s back officepersonnel to ensure that it accurately reflects thesettlement procedures for the programme.

Fiscal and paying agency agreementsA fiscal and paying agency agreement governs therelationship between the issuer and the fiscal and payingagent. The agreement sets forth their arrangements forissuing notes, making payment of principal and interest,and other related matters. The fiscal and paying agent isresponsible for the following:• authenticating notes at the time of issuance and, in somecases, serving as ‘custodian’ or ‘safekeeper’ for theexecuted notes;

• processing payments of interest, principal, and otheramounts on the securities from the issuer to theinvestors;

• communicating notices from the issuer to the investors;• coordinating settlement of the MTNs with the issuer andthe dealers; and

• processing certain tax forms that may be required underthe programme.

Unlike an indenture trustee in a US registered offering,the fiscal and paying agent solely performs ministerialfunctions and has no fiduciary duty to note holders anddoes not act on their behalf. For example, if an event ofdefault occurs under the terms of the notes, each noteholder is individually responsible for accelerating paymenton its own note, whereas an indenture trustee wouldaccelerate payment on all defaulted notes on behalf of thenote holders. As in the case of a programme agreement,this agreement applies to all issuances of securities underthe programme, so that a new agreement is not needed atthe time of each takedown.

Calculation agentThe fiscal and paying agent is also often engaged to act asthe calculation agent for an MTN programme. Thisengagement may be pursuant to a separate calculationagency agreement, or pursuant to the fiscal and payingagency agreement. The calculation agent calculates theinterest payments due in respect of floating rate notes, asto each relevant interest period. The calculation agent alsomay calculate the returns payable on a structured note.However, in the case of structured notes, given the type ofinformation needed to calculate the payments(information regarding equity securities or indices, forexample), a broker-dealer (usually, the arranger or a dealersuch as a broker-dealer affiliate of the issuer) is more likelyto serve as calculation agent.

Exchange rate agentOften, another function of the fiscal and paying agent is toserve as an exchange rate agent for the programme. In thiscapacity, the fiscal and paying agent will convert thepayments made by the issuer on foreign currency-denominated MTNs into US dollars amounts for thebenefit of US investors.

Closing deliverablesIn connection with the programme signing, the issuer isobligated to deliver to the arranger and the other dealerscertain documents. Many of these deliverables are alsorequired in connection with a large, syndicatedprogramme takedown. The issuer will deliver to the dealersan officers’ certificate as to the accuracy of the informationcontained in the offering documents, one or moreopinions of counsel and a comfort letter.

Commercial paperCommercial paper generally consists of short-termunsecured promissory notes issued by financial and non-financial companies. Many companies issue commercial



paper to raise capital in order to fund their day-to-dayoperations, because it can be a lower-cost alternative tobank loans or other debt securities. Commercial papermaturities can range up to 270 days, but averageapproximately 30 days. Issuers also establish commercialpaper programmes, usually naming one or more dealers,to sell commercial paper on a continuous basis. Wediscuss the exemptions applicable to commercial paper inChapter 8 (Considerations related to commercial paper)and also discuss the documentation requirementsassociated with the establishment of a commercial paperprogramme.

Integration issuesContinuous private placements and Regulation DofferingsIn a 1962 release, the SEC stated that, when determiningwhether an offering is public or private, it will considerwhether the offering was part of a larger offering. TheSEC set forth a number of factors that it would considerin making this determination—these are the same factorsset forth in Rule 502(a) under Regulation D. However, itis unlikely that a private placement made pursuant toRegulation D will be integrated with an issuance from anunregistered MTN programme, because most RegulationD offerings are of common stock and MTN programmesare for non-convertible debt (or non-convertiblepreferred stock).

Continuous private placements and the section3(a)(3) commercial paper programmeAnother integration issue that arises in connection withcontinuous private placements is whether the SEC wouldview as integrated an issuance from an unregistered MTNprogramme or section 4(a)(2) commercial paperprogramme with a concurrent section 3(a)(3) commercialpaper programme.The SEC has addressed the simultaneous private

placement of notes and section 3(a)(3) commercial paperofferings in a series of no-action letters. It permits theofferings, even where the maturities of the securitiesoverlap and the same dealers are used. In these cases,however, the issuers represented to the SEC that theproceeds of the two offerings would be used appropriately(for current transactions only, in the case of thecommercial paper proceeds, and for non-currenttransactions, in the case of the privately placed notes).Integration issues can also arise if an issuer decides to

convert a commercial paper programme from a section3(a)(3) programme to a section 4(a)(2) programme orconduct a concurrent registered continuous MTN

programme and a section 3(a)(3) commercial paperprogramme.In a commercial paper programme, dealer agreements

usually address integration by requiring that the issuerrepresent that the proceeds of the commercial paperprogramme under section 3(a)(3) will be segregated andthat it will implement appropriate corporate controls toprevent integration. The overlapping maturities aloneshould not result in integration, provided the programmescan be distinguished by their use of the proceeds, or theissuer can establish a reasonable distinction regarding theMTNs issued under the continuous programme and thesection 3(a)(3) commercial paper programme.



ENDNOTE1. For more information on bank note programmes, see

Chapter 6 (section 3(a)(2) and considerations forforeign banks financing in the United States).



Section 4(a)(2) provides that the registrationrequirements of section 5 do not apply totransactions by an issuer not involving any publicoffering. This is often referred to as the private

placement exemption for issuers. The breadth of thisexemption makes it useful for issuers attempting toconduct a variety of financing transactions. The rationalefor this exemption from registration is that the extensiveregulation applicable to public offerings is not requiredwhen offerings are made to a limited number of offereeswho can protect themselves. These exemptions areavailable to US and non-US public and private companies.In 1982, the SEC adopted Regulation D to provide issuerswith safe harbours for conducting section 4(a)(2) privateplacements.A section 4(a)(2) private placement provides an attractive

capital raising alternative for a foreign issuer consideringoffering securities in the US. A private placement permits aforeign issuer to raise significant capital without the costand delays of registration under the Securities Act and SECreview of offering documents. In addition, section 4(a)(2)private placements also have the advantage of providinggreater liquidity for foreign issuers and not requiring ortriggering extensive ongoing registration or disclosure forforeign issuers. Section 4(a)(2) private placements forforeign issuers almost always involve the sale of debtsecurities given that many foreign issuers seek to avoidhaving a base of equity holders in the US.

Section 4(a)(2) private placementsThere are a number of ways FPIs can raise capital in theUS, including private placements under section 4(a)(2)and Rule 144A offerings. Foreign companies that have aclass of their securities registered in the US may also raisecapital through public offerings. Under section 4(a)(2), theregistration and related prospectus delivery requirementsunder section 5 of the Securities Act are not applicable.However, the statute itself provides little guidance as to thetypes of transactions that fall within the scope of section4(a)(2). Judicial and regulatory interpretations haveproduced a fact-specific analysis of the types oftransactions that could be deemed a private offering, based

on the following factors.1 The factors are flexible, and nosingle factor is determinative.• The number of offerees and their relationship to each other

and to the issuer: This factor is significant. There is nomaximum permitted number of offerees; however, thelarger the number of offerees, the greater the difficultysustaining the evidentiary burden. Offering to a largeand diverse group with no pre-existing relationship tothe issuer suggests a public offering.

• The number of securities offered: The smaller the number,the less likely the offering will be deemed a publicoffering.

• The size of the offering: The smaller the size of theoffering, the less likely the offering will be deemed apublic offering.

• The manner of offering: There are two general conditions:(1) the offering should be made through directcommunication with eligible offerees by either the issueror the issuer’s agent; and (2) the offering cannot includeany general advertising or general solicitation.2

• The sophistication and experience of the offerees: Generalbusiness knowledge and experience usually are sufficient.Important factors to consider are education, occupation,business and investment experience and net worth. Aninvestor having a sophisticated representative probably(but not always) satisfies this test. Alternatives tosophistication are the financial ability to bear risks (inother words, the investor’s wealth) and the existence of aspecial relationship to the issuer (for example, insider orprivileged status, or personal relationship).

• The nature and kind of information provided to offerees orto which offerees have ready access: The disclosure neednot be as extensive as that in a registered offering, butmust be factually equivalent. Disclosing basicinformation regarding the issuer’s financial condition,business, results of operations, and management issatisfactory. All information must be made availableprior to sale.

• Actions taken by the issuer to prevent the resale of securities:Securities must come to rest in the hands of immediateinvestors. Premature re-sales of securities may be deemeda public distribution and considered part of the original


CHAPTER 4

Mechanics of a section 4(a)(2) offering


offering. Failure to satisfy the conditions of section4(a)(2) with respect to the entire transaction will resultin failure to qualify for the section 4(a)(2) exemption.Investors who do not purchase with the requisiteinvestment intent and who resell the securities may bedeemed statutory underwriters and may be unable torely on the section 4(a)(1) resale exemption. Issuersgenerally take certain precautions to prevent the resale oftheir securities, including obtaining a writtenrepresentation from each investor that it is acquiring thesecurities for investment and not with a view todistribution, placing restrictive legends on the securities,and issuing stop transfer orders with respect to thesecurities. The nature of the securities (in other words,debt or equity) is irrelevant to the availability of thesection 4(a)(2) exemption.These factors, while helpful, do not provide certainty for

an issuer that seeks to conduct a private placement. Inresponse, the SEC adopted Regulation D in 1982 toprovide issuers with safe harbours for conducting section4(a)(2) private placements.The section 4(a)(2) exemption is available only to the

issuer of the securities. It is not available for the resale ofsecurities purchased by investors in a private placement.The issuer claiming the section 4(a)(2) exemption has theburden of establishing that the exemption is available forthe particular transaction. If securities are sold without avalid exemption from registration, section 12(a)(1) of theSecurities Act gives the purchaser the right to rescind thetransaction for a period of one year after the sale. Therescissionary right may be exercised against anyone whowas involved in the sale of the security, including issuerand any broker-dealer that may have acted as a financialintermediary or placement agent in connection with theoffering. Further, transactions that are not deemed exemptunder section 4(a)(2) will be treated as an unregisteredpublic offering, and the issuer may be subject to liabilityunder US federal securities laws.

Regulation DRegulation D is a non-exclusive safe harbour, which meansan issuer that fails to satisfy the objective criteria ofRegulation D still may rely on Section 4(a)(2). RegulationD is available only to issuers, and applies only to aparticular transaction. Therefore, resales of securities mustbe registered or made pursuant to another exemption.Regulation D does not exempt the issuer from any other

applicable US federal or state laws relating to the offer andsale of securities. Regardless of whether an issuer relies onSection 4(a)(2) or Regulation D, an issuer must be able todocument its compliance with the relevant exemption in

the following ways: through record keeping with respect toinvestors; by controlling the distribution of the offeringmemoranda; and by receiving and retaining appropriatesubscription documents evidencing the nature andqualification of investors. Regulation D is comprised ofseven rules—Rules 501 through 504 and Rules 506through 508:• Rule 501 sets forth definitions for terms usedthroughout Regulation D.

• Rule 502 sets forth the general conditions relating tointegration of offerings, information requirements,limitations on manner of offering and limitations onresale.

• Rule 503 requires notices for sales.• Rule 504 provides an exemption pursuant to section3(b) of the Securities Act for offerings up to $5 million.In October 2016, the SEC adopted final rules that,among other things, (1) amended Rule 504 to (a)increase the aggregate amount of securities that may beoffered and sold in any 12-month period from $1million to $5 million and (b) disqualify certain badactors from participating in Rule 504 offerings, and (2)repealed Rule 505 of Regulation D, which had provideda safe harbour from registration for securities offered andsold in any 12-month period from $1 million to $5million. The repeal of Rule 505 took effect on May 202017.

• Rule 506, which is the rule most often relied on forRegulation D private placements, provides anexemption for limited offerings and sales without regardto dollar amount.3 Although the number of purchasersunder Rule 506 is limited to 35, issuers may sellsecurities under Rule 506 to an unlimited number of AIswhich are typically institutional investors or high net-worth individuals.4 Rule 502(c) permits the use ofgeneral solicitation if all purchasers are accreditedinvestors, or the issuer reasonably believes that they are,immediately prior to the sale, and certain otherrequirements are met. Rule 506(b) does not permit theuse of general solicitation, in which case the issuer mayoffer and sell securities to non-accredited and accreditedinvestors. Rule 506(d) prohibits the use of theexemption by certain bad actors and felons.

• Rule 507 states that no exemption under Rules 504 or506 will be available for an issuer if such issuer or any ofits predecessors or affiliates has been subject to any order,judgment or decree of any court of competentjurisdiction temporarily, preliminarily or permanentlyenjoining such entity for failure to comply with Rule503.

• Rule 508 states that a failure to comply with a term,



condition or requirement of Rules 504 or 506 will notresult in the loss of the exemption from registration ifthe person relying on the exemption shows that: (1) thefailure to comply did not pertain to a term, condition orrequirement directly intended to protect that particularindividual or entity; (2) the failure to comply wasinsignificant with respect to the offering as a whole; and(3) a good faith and reasonable attempt was made tocomply with all the applicable terms, conditions andrequirements of Rules 504 or 506. A failure by an issuerto perform a factual inquiry and provide any disclosureregarding bad actor events required by Rules 504 or 506would not be considered an insignificant deviation, andrelief would not be available under Rule 508 if thisdisclosure is required and not adequately provided.5

The SEC used authority granted by section 3(b) of theSecurities Act to establish Rule 504 of Regulation D.Under section 3(b), transactions can be exempted fromregistration based on the limited size or limited characterof the offering. Therefore, Rule 504 exempts certainofferings with a total size of up to $5 million. Thisexemption was created to help small businesses raisecapital. In contrast, the SEC established Rule 506 as anon-exclusive safe harbour under section 4(a)(2). Rule 506provides the clearest guidance on the availability of section4(a)(2). Typically, issuers try to follow Rule 506 closely toconduct section 4(a)(2) private placements. Like securitiessold under section 4(a)(2), securities sold underRegulation D (except for certain securities sold under Rule504 of Regulation D) are considered restricted securitiesfor purposes of Rule 144 and cannot be freely resold to thepublic without registration or exemption from registration.

QuestionnairesThe issuer typically uses investor questionnaires to helpcollect and verify information about potential investors’suitability to participate in the offering. A potentialinvestor can qualify to participate in the offering if it is asufficiently sophisticated investor or by using a purchaserrepresentative. In such cases, a questionnaire is also sent tothe purchaser representative to verify that it is qualified toparticipate.The issuer has the burden of determining the status of

potential investors. If the issuer sells unregistered securitiesto an unqualified investor, the issuer cannot rely on theprivate placement exemption. Selling without aregistration statement or valid registration exemption giveseach purchaser (not just the unqualified purchaser) theright to rescind or cancel its purchase and recover thepurchase price (plus interest) from the issuer for one yearafter the sale. Under section 12(a)(1) of the Securities Act,

a purchaser no longer holding the securities can recoverdamages from the issuer regardless of whether or not itslosses arise from the issuer’s failure to register thosesecurities. To avoid this strict liability, issuers rely oninvestor questionnaires to protect the availability of theirregistration exemptions. Together, the purchaserrepresentative questionnaire and the investor questionnairehelp the issuer establish the status of its investor base andavoid strict liability under section 12(a)(1) of the SecuritiesAct.

Information requirements for non-accreditedinvestorsTo use Rule 506, the issuer must provide each non-accredited investor with certain information. Rule502(b)(2) of Regulation D requires disclosure similar tothe type provided in a Securities Act registration statement.For example, depending on the size of the offering, issuersshould provide non-accredited investors with the mostrecent balance sheet, income statements, statements ofstockholders’ equity and similar audited financialstatements for the preceding two years, as well as adescription of the issuer’s business and the securities in theoffering. The issuer must also provide non-accreditedinvestors with a brief written description of any materialinformation about the offering that is given to AIs. Whiledisclosure requirements are not applicable to offeringsmade to AIs, it is best practice to provide the sameinformation to both accredited and non-accreditedinvestors in light of the antifraud provisions of the federalsecurities laws. More often than not, issuers will limit theirofferings to AIs only and may not produce a disclosuredocument in connection with the financing.Issuers must give all investors the opportunity to ask

questions about the terms and conditions of the offeringand to verify the accuracy of the disclosed writteninformation. This due diligence is often done in atelephone conference call with members of the issuer’smanagement team and counsel. For Regulation Dofferings involving a business combination or exchangeoffer, the issuer must also provide written informationabout any terms or arrangements in the proposedtransaction that are materially different from those for allother security holders.



Restriction on general solicitation andadvertisingRule 502(c) of Regulation D prohibits any generalsolicitation or advertising of the unregistered offering bythe issuer or any person acting on its behalf. Generalsolicitation is also prohibited in a section 4(a)(2) offering.This prohibition extends to advertisements, articles,notices or other publication in any US newspaper,magazine or similar media (including the internet),broadcasts over US television or radio (including theinternet) and any seminar or meeting in the US whoseattendees have been invited by any general solicitation oradvertisement.6 SEC Staff has provided guidance regardingthe types of communications that would be viewed as

constituting a general solicitation. Effective September2013, Rule 502(c) was amended to allow generalsolicitation under Rule 506(c) if all purchasers areaccredited investors, or the issuer reasonably believes thatthey are, immediately prior to the sale, and certain otherrequirements are met. An issuer may still choose toconduct a Rule 506(b) offering without using generalsolicitation, in which case it may offer and sell securities tonon-accredited and accredited investors.For reporting companies offering securities to non-

accredited investors, the prohibition on general solicitationis weighed against the issuer’s obligation to inform itsinvestors of material events, such as new securitiesofferings and the use of proceeds from such offerings. Rule


The two Regulation D exemptions have the following limitations:Rule 504

Maximum size of offering

Issuers permitted to rely onthis exemption

Types of investors that canbuy the securities

Issuer to furnish certaininformation?

Prohibition on generalsolicitation oradvertisement?

Bad actor prohibition?

Limitations on resale ofsecurities?

Subject to integration?

Form D filing?

$5 million per year.

Non-reporting companies(including foreign privateissuers that provideinformation under Rule 12g3-2(b) of the Exchange Act),companies that are notinvestment companies (asdefined in the InvestmentCompany Act of 1940, asamended) and blank checkcompanies.

Any investor. No limitation onthe number of investors orrequirement of sophistication.

No.

Yes, subject to the twoexceptions provided by Rule504(b)(1).

Yes.

Yes, subject to the twoexceptions provided by Rule504(b)(1).

Yes.

Yes.

Rule 506(b)No limit on size of offering.

Any issuer. It is used by bothreporting companies andnonreporting companies.Rule 506(d) prohibits the useof the exemption by certainbad actors and felons.

An unlimited number ofaccredited investors and upto 35 non-accreditedinvestors (who alone ortogether with their purchaserrepresentatives must besophisticated investors).

Yes, to non-accreditedinvestors.

Yes.

Yes.

Yes.

Yes.

Yes.

Rule 506(c)No limit on size of offering.

Any issuer. It is used by bothreporting companies andnonreporting companies.Rule 506(d) prohibits the useof the exemption by certainbad actors and felons.

Purchasers must beaccredited investors. Issuermust take reasonable stepsto verify accredited investorstatus.

N/A

No.

Yes.

Yes.

Yes.

Yes.


135c of the Securities Act addresses this tension byproviding a safe harbour from the prohibition for certainpublic announcements of unregistered offerings. To useRule 135c, the following conditions must be met:• The issuer must be a reporting company under theExchange Act or claim the Rule 12g3-2(b) exemptionfrom registration under the Exchange Act.

• The press release cannot be made to condition or primethe US market for the offered securities. Given thiscondition, most issuers are advised to publish the noticeonly after completing the solicitation phase of theoffering or excluding potential investors who startcommunicating with the offering participants afterpublication of the notice.

• The type of information disclosed must be of the samegeneral type allowed in press releases for registeredofferings, such as name of the issuer, title and amount ofthe offering, the interest rate and maturity date of thesecurities, closing date of the offering, the purpose of theoffering without naming the initial purchasers or partiesacting as underwriters for the unregistered offering andany statements or legends required by US state or non-US law. The type of information disclosed also dependson the offering type.

• The press release must contain a restricted legendstating: ‘The securities have not been registered underthe Securities Act and cannot be sold in the US withoutregistration or an applicable registration exemption.’

• The issuer must file a copy of the press release with theSEC on Form 6-K if it is a reporting issuer, or mustpublish it electronically in accordance with Rule 12g3-2(b).

Six-month integration safe harbourFor a valid Regulation D offering, all sales that are part ofthe same Regulation D offering must satisfy all of theterms and conditions of Regulation D. To determinewhich sales form a part of the same Regulation D offering,Rule 502(a) of Regulation D provides a six-monthintegration safe harbour. It provides that offers and salesmade more than six months before the start, and morethan six months after the completion, of a Regulation Doffering are not typically integrated with each other. Thissix-month rule is also relevant to the section 4(a)(2)integration analysis. Offers and sales made under employeebenefit plans are allowed during this six-month period andare not integrated with the Regulation D offerings. Therealso are a number of other specific integration safeharbours.For offers and sales made during the six-month period,

securities counsel can help determine if different offerings

should be integrated. The integration analysis becomesimportant in certain situations, including:• Where an issuer sells to non-accredited investors in acontinuous offering, or in a series of private placements,the issuer must determine if it sold to more than 35 non-accredited investors. When computing the number ofbuyers under Rule 501(h), any Regulation D offeringsmade simultaneously, or within six months of offeringsmade outside of the US in compliance with RegulationS, are not integrated. In this case, non-US investors arenot relevant to the 35 non-accredited investors limit.

• Where there may have been a violation of theprohibition against general solicitation or advertising. Inthis situation, the issuer must determine the scope of theoffering with which the questionable communication islinked.

• Where the issuer conducts concurrent private and publicofferings. Under certain circumstances, there can be aprivate offering under Rule 506 of Regulation D orsection 4(a)(2) and a registered public offering that arenot integrated.7 For example, the private and publicofferings would not be integrated if the investors in theprivate offering were not solicited through theregistration statement, but rather through a substantive,pre-existing relationship with the issuer.8

Form D filingRegulation D requires an issuer (whether or not it is areporting company) to file with the SEC a notice on FormD no later than 15 days after the first sale of securitiesmade under Regulation D. Typically, issuers often complywith Regulation D in all other respects, other than thisfiling requirement. However, there can be instances whenissuers prefer to make a Form D filing to give the SECnotice of their unregistered offerings and ensure theirprivate placements fall within the black letter ofRegulation D.In connection with the amendments to Rule 506

effective September 2013, Form D was amended to add acheck box to Item 6 for specifying the use of Rule 506(c)(offerings to AIs using general solicitation). The signaturebox was also amended to add a certification that the issueris not disqualified from relying on Rule 506 due to thedisqualification provisions of Rule 506(d).The Form D filing is no longer a condition to the

availability of Regulation D for a particular offering.However, under Rule 507, the SEC can prohibit an issuerwho was previously subject to an injunction for failing tofile Form D, from future reliance on Regulation D (unlessthe SEC determines, on a showing of good cause, that theexemption should not be denied).



Private placement documentationSecurities acquired pursuant to a section 4(a)(2) offering maybe immediately resold under Rule 144A. The intent to resellunder Rule 144A is not inconsistent with Section 4(a)(2) anddoes not affect the availability of the issuer’s exemption. In aRule 144A transaction, an investment bank, acting as theinitial purchaser, will agree to purchase on a firmcommitment basis in a section 4(a)(2) private placementunregistered securities from an issuer and the investmentbank then immediately resells these securities only to QIBs(or to other purchasers that the investment bank and anypersons acting on its behalf reasonably believe to be QIBs).As a result, Rule 144A transactions are structured as principaltransactions. In a section 4(a)(2) transaction, an investmentbank will agree to place the unregistered securities, on a besteffort basis, with investors who may choose to hold thesecurities for the long-term or resell the securities to apurchaser pursuant to another exemption from registration(usually, a Rule 144A resale to a QIB).Some section 4(a)(2) transactions may be structured so

that the initial purchasers are all QIBs; in these so-calledRule 144A qualifying transactions, the investment bank willact on an agency basis to arrange the sale of the securitiesdirectly by the issuer to the QIB investors. Each QIBinvestor, in its securities purchase agreement, will make theusual representations made by a purchaser in a section4(a)(2) offering – including that it understands that thesecurities are restricted securities and cannot be freely resold,that it can fend for itself in the transaction and that it hassuch knowledge and experience in business matters so as tobe capable of evaluating the merits and risks of theprospective investment and that it has the ability to bear theeconomic risks of the investment, including the completeloss thereof. When all of the investors in a Rule 144Aqualifying section 4(a)(2) private placement are QIBs, thesecurities will be eligible for settlement and transfer throughThe Depository Trust Company (DTC).The following is a description of section 4(a)(2) private

placement documentation. For a discussion ofdocumentation for a Rule 144A offering, please refer toChapter 5 (Mechanics of a Rule 144A/Regulation S offering).The documentation typically used in section 4(a)(2)

private placements includes a private placementmemorandum, a securities purchase agreement and aplacement agency agreement, along with legal opinions,comfort letters, and other ancillary documentation.

Private placement memorandumSection 4(a)(2) does not require specific disclosure for anoffering document. The information that is included in aprivate placement memorandum (PPM) will vary greatly

depending on the type of offering. For example, anoffering memorandum used for a Rule 144A offering willbe very different from a PPM used for a section 4(a)(2)offering to a small number of investors.9 By and largePPMs or offering circulars used in a Rule 144A offeringwill be detailed and may be similar to the type of thedisclosure contained in a prospectus. However, a PPM fora section 4(a)(2) offering may contain an abbreviatedbusiness description, risk factors, some financialinformation and possibly incorporate other publiclyavailable information about the issuer.

Securities purchase agreementThe form, organisation, and content of a securitiespurchase agreement for a section 4(a)(2) private placementwill differ depending on the type of offering. Many foreignissuers offer debt securities in cross-border debt privateplacements. The buyers in these offerings usually areinstitutional investors, often including insurancecompanies and pension funds. These cross-border privateplacements are often referred to as insurance privateplacements. The documentation for these cross-borderprivate placements has become quite standardised over theyears.The securities purchase agreements in these transactions

are typically based on approved forms that containstandard representations and warranties related to theissuer, the securities offered, the business and otherrepresentations designed to supplement the due diligenceinvestigation of the placement agent (if applicable) and thepurchasers. In addition, the agreement will containrepresentations, warranties and covenants specific to thesection 4(a)(2) offering, including, the issuer has notengaged in general solicitation or general advertising, theissuer has not engaged in other offerings that may beintegrated with the section 4(a)(2) offering and the offeredsecurities qualify for the section 4(a)(2) exemption. Unlikean underwriting agreement for a public offering, thepurchasers in a section 4(a)(2) private placement will alsomake limited representations to, and warranties andcovenants with, the issuer, including that the purchasersare accredited investors and the purchasers understand therisks of an investment in the securities.

Placement agency agreementA placement agency agreement may be used in the contextof certain private placements, although it is not commonto use a placement agency agreement in the context ofcross border debt private placements. More often than not,the issuer will enter into an engagement letter with theplacement agent, which will address the fees and expenses



to be paid by the issuer in connection with the transaction,as well as the term of the engagement. The engagementletter may contain certain basic representations andwarranties from the issuer to the placement agent. Theengagement letter generally also will provide that theplacement agent will receive the benefit of and be entitledto rely on the representations and warranties of the issuerand of the investor made in the securities purchaseagreement as well as on any legal opinion delivered by theissuer’s counsel to the investors.

Comfort letters and legal opinionsWhile a comfort letter (a letter from the issuer’sindependent certified accountants that the financialstatements included in an offering document meetspecified applicable standards) will almost invariably bedelivered in connection with a Rule 144A offering, it isusually not requested in a section 4(a)(2) offering toinstitutional investors.In a section 4(a)(2) private placement, counsel to the

issuer and, to a more limited extent, counsel to theplacement agent (if applicable) or the purchasers, arerequired to provide standard corporate and transactionopinions. In addition, to the extent that a PPM wasprepared and used in connection with the offering,financial intermediaries may require that issuer’s counseldeliver negative assurance letters (also referred to as 10b-5letters).



ENDNOTES1. See SEC Release No. 33-3825; SEC Release No. 33-

4552; and SEC Release No. 33-5121.2. General solicitation is permitted in Rule 506

offerings, but not in section 4(a)(2) offerings.3. Rule 506 of Regulation D is based on section 4(a)(2),

while Rule 504 was promulgated under section 3(b) ofthe Securities Act.

4. Rule 501 promulgated under Regulation D sets forththe definition of an accredited investor. In order for anindividual to qualify as an accredited investor, theymust : (1) earn an individual income of more than$200,000 per year, or a joint income of $300,000, ineach of the last two years and expect to reasonablymaintain the same level of income; (2) have a networth exceeding $1 million, either individually orjointly with their spouse; or (3) be a general partner,executive officer, director or a related combinationthereof for the issuer of a security being offered.Accredited investors are not counted as purchasers forpurposes of counting purchasers under Regulation D.

5. See SEC Release No. 33-9414; File No. S7-21-11(September 23 2013).

6. We discuss the SEC Staff ’s guidance regarding thetypes of communications that constitute a generalsolicitation in ‘Practice Pointers on Navigating theSecurities Act’s Prohibition on General Solicitationand General Advertising,’ available athttps://media2.mofo.com/documents/160600practicepointersgeneralsolicitation.pdf

7. See SEC Release No. 33-8828 and the Black BoxIncorporated (June 26 1990) and Squadron, Ellenoff,Pleasant & Lehrer (February 28 1992) SEC no-actionletters.

8. Id.9. We discuss offering circulars in the context of a Rule

144A offering in Chapter 5 (Mechanics of a Rule144A/Regulation S offering).



https://media2.mofo.com/documents/160600practic

Structuring a Rule 144A offeringOfferings structured in reliance on Rule 144A include:• offerings of debt or preferred securities, either of whichmay be convertible into common stock, by publicreporting companies, structured either as standaloneRule 144A offerings, or with subsequent A/B exchangeoffers or resale registration rights;

• offerings by foreign issuers of depositary receipts or debtsecurities in order to access the US capital marketswithout becoming subject to US reportingrequirements;

• offerings of common stock by private, non-reportingissuers (that is, Rule 144A equity offerings);

• offerings of high yield debt securities by privatecompanies, structured either as standalone Rule 144Aofferings or with subsequent A/B exchange offers orresale registration rights; and

• Rule 144A continuous offering programmes for debt orstructured securities.Securities acquired pursuant to a section 4(a)(2) offering

or a Regulation D offering may be immediately resoldunder Rule 144A. The intent to resell under Rule 144A isnot inconsistent with section 4(a)(2) or Regulation D. Aninvestment bank, acting as the initial purchaser, will agreeto purchase on a firm commitment basis in a privateplacement an entire issue of unregistered securities from aforeign issuer. The investment bank will then immediatelyresell these securities to QIBs (or to purchasers that it andany persons acting on its behalf reasonably believe to beQIBs). This is possible because purchasing from an issuerwith a view to reselling under Rule 144A will not affect theavailability to the issuer of the section 4(a)(2) orRegulation D exemption.We discuss some of these transactions in more detail

below, focusing on the offering process anddocumentation, disclosure issues and liability concerns forforeign issuers.

Standalone Rule 144A offeringA Rule 144A offering for an issuer that is not a US reportingissuer will often take the form of a standalone offering. Astandalone Rule 144A transaction may be structured as a

Rule 144A-only (or Rule 144A for life) offering or as a Rule144A-eligible offering. Both begin as private placements byan issuer to a broker-dealer that is acting as initial purchaser.However, the two offerings differ with respect to permittedresales. In a Rule 144A-only offering, until the securitiesbecome freely tradable under Rule 144 or are registeredunder the Securities Act, any resale may be made only underRule 144A. Generally, in a Rule 144A-only offering, theinitial offering is made to QIBs (or to other purchasers thatthe initial purchasers and any persons acting on their behalfreasonably believe to be QIBs). However some Rule 144A-only offerings permit institutional accredited investors thatare not QIBs to participate. In a Rule 144A-eligible offering,resales are permitted to be made under Rule 144A as well asother available exemptions, including the hybrid section4(a)(1½) exemption, Rule 144 or in a secondary privateplacement.

Debt offeringsBoth equity and debt can be issued under Rule 144A.However, the exclusion of fungible securities from Rule144A has the practical effect of making Rule 144Aofferings more common for debt or other securities,including preferred stock, that have been structured toavoid fungibility. Whether through a Rule 144Astandalone offering, or a continuous offering programmeas discussed below, foreign banks may consider using Rule144A to issue different types of debt securities, includingwithout limitation:• senior unsecured debt;• senior secured debt (including covered bonds);• subordinated debt;• structured debt (for example, commodity-linked notes);• hybrid debt;• CoCo debt; and• deposit liabilities.A foreign bank may issue debt securities through its

home office entity, its US branch entities, or otheraffiliated entities, such as financing special purposevehicles (SPVs). A foreign issuer must always consult itsUS tax counsel to discuss any US federal income tax issuesin structuring offerings of debt securities.


CHAPTER 5

Mechanics of a Rule 144A/Regulation Soffering


The benefits of a Rule 144A offering compared to aregistered offering include:• more flexible disclosure requirements;• no liability for a registration statement under section 5of the Securities Act (although the anti-fraud provisionsare still applicable);

• lower costs;• limited ongoing reporting obligations; and• none of the corporate governance provisions of the USfederal securities laws and the US securities exchangesand related liabilities, particularly those of the Sarbanes-Oxley Act. The process of conducting a Rule 144A debt offering,

whether high yield, investment grade or convertible debt,closely follows that for a registered offering, as discussedbelow.

Rule 144A continuous offering programmesfor debt or structured securitiesAn issuer that intends to engage in multiple offerings mayhave a Rule 144A programme or a combined Rule144A/Regulation S programme. These programmes areattractive to foreign banks, and are in fact often used byfinancial institution and insurance company issuers tooffer securities through one or more broker-dealers toinstitutional investors in continuous offerings. Rule 144Aprogrammes are established to offer securities (usually inthe form of MTN programmes) on an ongoing orcontinuous basis to QIBs, or non-US persons, in the caseof a Regulation S tranche. These continuous debtprogrammes mirror similar publicly registered offeringsand have the following benefits:• no public disclosure of innovative structures or sensitiveinformation;

• limited (or no) Finra filing requirements; and• reduced potential for liability under the Securities Act.A non-registered MTN programme may rely on eitherRegulation D (if the securities are sold directly toinvestors) or Rule 144A (with or without a Regulation Stranche) for the takedowns.

Combined Rule 144A and Regulation SofferingsThe addition of a Regulation S tranche to a Rule 144Aoffering can significantly expand the potential investorpool to include non-QIBs outside the US. The structure ofa combined Rule 144A and Regulation S offering by a USor foreign issuer depends on, among other factors:• whether the Rule 144A domestic or the Regulation Sforeign tranche of the offering predominates, andwhether the issuer is a reporting issuer in the United

States (US domiciled or foreign); and• to a lesser extent, whether the financial intermediary isUS or non-US based.Rule 144A combined offerings are often focused on the

US market. In such a case, the combined offering willoften be structured to resemble a US public offering inmany respects, but with necessary modifications based onapplicable offshore jurisdiction laws and customarypractices. Accordingly, Rule 144A combined offerings by aforeign issuer may include appropriate modifications, forexample to the offering memorandum, as we describebelow. If an issuer is primarily conducting a Regulation Soffering targeting a non-US market, the issuer will insteadfollow the local approach in its Regulation S capital raisingactivities and include the necessary safeguards to complywith both Regulation S and Rule 144A.

The offering process for a Rule 144A orcombined Rule 144A/Regulation S offeringThe Rule 144A offering process, with or without aRegulation S tranche, is often similar to the public offeringprocess, particularly a firm commitment underwriting,without SEC filings or review. A fully marketed Rule 144Atransaction typically includes:• preparation of the preliminary offering memorandumand performance of necessary due diligence by the initialpurchasers;1

• solicitation of orders using a red herring or preliminaryoffering memorandum;

• preparation of: (1) a purchase agreement between theissuer and the initial purchasers; (2) an indenture orpaying agency agreement, if debt securities are beingoffered (see the section below, Debt instrumentdocuments) or a certificate of designations or otherinstrument if preferred equity is being offered; (3) aregistration rights agreement, if the securities will beregistered with the SEC after the initial settlement; and(4) other required deal and closing documents;

• preparation and delivery of a final term sheet to investorsindicating the final pricing terms;

• execution of the purchase agreement at pricing;• delivery of a comfort letter from the issuer’s auditors atpricing;

• preparation and delivery of a final offeringmemorandum and confirmation of orders frominvestors;

• closing within two to five business days after pricing;and

• at closing, execution, delivery and filing, as applicable, ofany indenture or pay agency agreement, certificate ofdesignations, or other instrument, and registration rights



agreement; and delivery of legal opinions and otherclosing documents, including a bring-down comfortletter.The process will also reflect the legal and customary

requirements of the foreign jurisdictions in which theRegulation S tranche, if any, will occur.In terms of settlement and clearance, the purchase

agreement between the issuer and the initial purchasersshould specify whether the securities will be issued inbook-entry or certificated form. In most Rule 144Aofferings, the securities are represented by a global securitydeposited with DTC and registered in the name of DTC’snominee, Cede & Co., except for securities issued to non-QIBs in certificated form or to others who are permittedto request securities in such form. Use of global securitiesheld by depositaries such as DTC, Euroclear andClearstream usually results in clearance procedures andtiming that, from the investors’ viewpoint, are identical tothose used for publicly offered securities.

The documentation for a Rule 144A orcombined Rule 144A/Regulation S offeringThe documentation typically used in both debt and equityRule 144A transactions, with or without a Regulation Stranche, is similar to that used in registered offerings,including:• an offering memorandum, similar to a prospectus;• a purchase agreement between the issuer and the initialpurchasers, similar to an underwriting agreement;

• an agreement among underwriters or syndicationagreement;

• in some cases, a registration rights agreement betweenthe issuer and the initial purchasers;

• in a debt offering, an indenture (or fiscal and payingagency agreement);

• comfort letters from the issuer’s auditors; and• closing documentation including bring-down comfortletters, legal opinions, a 10b-5 letter from legal counseland closing certificates.The issuer will work with its counsel, investment bank,

investment bank’s counsel and independent accountants toprepare the necessary documents.

Documentation issuesWhile both debt and equity Rule 144A offerings andcombined Rule 144A/Regulation S offerings usedocumentation that resemble that used in registered publicofferings, many factors affect the documents and theirpreparation. These factors include the nature of the issuer(US or foreign, reporting or non-reporting, credit ratingsand the like), the nature of the initial purchasers (US or

European or other foreign-based institutions) and theintended market for the offering. Combined Rule144A/Regulation S offerings by non-US issuers or led bynon-US financial intermediaries may use documents basedon the country- specific practices of the relevant non-USjurisdiction or jurisdictions, particularly if the Rule 144Atranche is small. However, the disclosure documents insuch a case generally will contain the same substantiveinformation, so that investors have the same disclosurepackage.In a Rule 144A programme or Rule 144A/Regulation S

programme, similar to a registered MTN programme, anissuer uses a master set of disclosure documents,agreements with dealers and fiscal and paying agencyagreements to minimise the new documentation needed atthe time of each takedown.

Offering memorandumRule 144A does not mandate specific disclosure for anoffering document.2 In practice, most Rule 144A offeringmemoranda resemble in content and style a prospectus fora registered public offering under the Securities Act. Thisapproach can bolster the defence against potentialliabilities of the issuer and the initial purchasers forviolations of the antifraud provisions of the US securitieslaws and assist in the marketing of the securities.3

As with preparing a prospectus for a public offering, thetwo primary reference points in preparing a Rule 144Aoffering memorandum are the specific requirements ofRegulation S-K under the Securities Act and thefundamental concept of materiality. Regulation S-K andForm S-1 or S-3 set forth the specific matters that the SECrequires in a registered offering by domestic issuers, andForm F-1 or F-3 and Form 20-F set forth similar, but notwholly identical, information that the SEC requires in aregistered offering by foreign issuers. The mattersaddressed in both Regulation S-K and Form 20-F include,among others, the issuer’s business, properties, risks,financial condition and results of operations, together withmanagement’s discussion and analysis of such financialcondition and results of operations, management,executive compensation, and corporate governance. Inaddition, Regulation S-X, which governs the financialstatements included in a registered offering of US andforeign issuers, is also a useful guide. The financialstatements included in a Rule 144A/Regulation S offeringmemorandum might not necessarily comply with all therequirements of Regulation S-X. For purposes ofcompliance with Regulation S, the offering memorandumfor a combined Rule 144A/Regulation S offering containsextensive disclosure regarding resale limitations and



transfer restrictions, and, if the securities will be held inbook-entry format (as is customary), the book-entryprocess.

Purchase agreementThe form, organisation and content of a purchaseagreement for a Rule 144A offering usually resembles afirm commitment underwriting agreement for a publicoffering, modified to reflect the private offeringmethodology. In a combined Rule 144A/Regulation Stransaction, a purchase agreement will contain standardrepresentations and warranties related to the issuer and itsbusiness and the securities offered, as well as otherrepresentations designed to supplement the due diligenceinvestigation of the initial purchasers. In addition, thepurchase agreement will contain representations,warranties and covenants specific to the Rule144A/Regulation S offering, including:• The issuer has not engaged in general solicitation orgeneral advertising (unless the issuer chooses to usegeneral solicitation or general advertising, which arepermitted for Rule 144A offerings so long as thesecurities are sold to a QIB or to a purchaser that theseller and any person acting on the seller’s behalfreasonably believes is a QIB).

• The offered securities meet the eligibility requirementsunder Rule 144A.

•. The issuer is not an open-end investment company, unitinvestment trust or face-amount certificate company.

• The issuer will not use directed selling efforts as definedunder Regulation S, and if the securities offered areCategory 2 or 3 securities, it has implemented thenecessary Regulation S offering restrictions.

• If the securities are debt securities or Americandepositary receipts (ADRs), the issuer will not resell anysecurities in which it or any of its affiliates has acquireda beneficial ownership interest. Unlike an underwriting agreement for a public offering,

the initial purchasers in a combined Rule 144A/RegulationS transaction will also make limited representations,warranties and covenants, typically as to the relevantsecurities law requirements.

Debt instrument documentsIn addition to the documents necessary for any Rule 144Aoffering, a debt offering requires an instrument to governthe terms of the debt. An indenture is frequently used;however, if the debt securities will not be registeredsubsequently with the SEC, particularly if the offering is astandalone Regulation S offering, a fiscal and payingagency agreement may be used to cover these matters. The

parties to the indenture (or other agreement) are the issuer,any guarantors of the debt securities and the trustee. Aforeign bank that engages in a continuous Rule 144Aprogramme (with or without a Regulation S component)or MTN programme, or expects to offer additional debtsecurities, may also use a universal indenture, similar tothat used in registered shelf offerings, which permits theissuance of different tranches or classes of debt securities.It is standard to have registration rights for the common

stock that is issuable upon conversion of a convertiblesecurity or exercise of a warrant, particularly if the issueralready is a reporting company. Registration rights are alsocommon for Rule 144A offerings of high yield debt. FewRule 144A/Regulation S offerings by foreign issuers thatare non-reporting companies are done with registrationrights, because many foreign issuers find ongoingreporting obligations and compliance with US federalsecurities laws too burdensome.

Comfort letters and legal opinionsA comfort letter is a letter from the issuer’s independentcertified accountants stating that the financial statementsincluded in a particular document used in an offering meetspecified applicable standards. It may also include theaccountants’ conclusions regarding its comparison ofspecified financial information in the offering document(or incorporated by reference) to the informationcontained in the issuer’s financial statements or accountingrecords. In certain combined offerings for foreign issuers(and in Regulation S offerings), including those withseparate syndicates for the Rule 144A and Regulation Stranches, foreign accountants expect to enter into anengagement letter with the investment banks acting asagents or initial purchasers before they provide a comfortletter. The comfort letter will also not follow the standarddisclosure that US issuers and financial intermediariesexpect because of the different regulatory schemeapplicable to the foreign issuer.In a Rule 144A/Regulation S offering, counsel to the

issuer and, to a more limited extent, counsel to the initialpurchasers, are required to provide standard corporate andtransaction opinions. In addition, financial intermediarieswill require, under most circumstances, that both issuer’sand initial purchasers’ counsel provide 10b-5 lettersconsistent with standard US public market underwritingpractice. In a Regulation S transaction, the delivery ornon-delivery of a 10b-5 letter by a US law firm can be akey factor in determining the jurisdictions into which asecurities offering will be targeted. US broker-dealers willnot participate in a Rule 144A offering without a 10b-5letter from a US law firm that is based upon a due



diligence investigation customary in the US market. Withforeign issuers, access, cost and timing issues may arise inRule 144A/Regulation S offerings because of the extent ofthe due diligence investigation required by US counsel togive this opinion. Accordingly, this factor must beconsidered early on in the process.

Disclosure issuesOffering memorandumBecause the anti-fraud provisions of the US securities lawsapply to Rule 144A offerings,4 most Rule 144A offeringmemoranda are similar in content and style to a prospectusfor a registered offering under the Securities Act. Thebenefits of this more inclusive offering document are thatit may be used by the initial purchasers as a marketingdocument for the ultimate investors and serve as a defenceagainst potential liabilities of the issuer and the initialpurchasers for violations of the antifraud provisions of theUS securities laws.5 For an issuer that is not public in anyjurisdiction, drafting a Rule 144A offering memorandumcan be a difficult, expensive and time-consuming process.The fact that the offering memorandum is not subject toSEC review does afford the parties more flexibility. Theissuer, its counsel and the initial purchasers mightdetermine to include more abbreviated disclosure in a Rule144A offering memorandum.The main benefit for a reporting company (US or

foreign) conducting a Rule 144A offering is that thedisclosure for the offering memorandum can be preparedmore quickly. A US reporting company can incorporate byreference into the offering memorandum its Exchange Actfilings. A foreign issuer that is a reporting company mayneed to furnish information about the offering to the SECunder Form 6-K to the extent that such information isrequired to be: (1) made public under the laws of its homejurisdiction; (2) filed with a securities exchange whichmakes the information public; or (3) distributed to itssecurity holders.

Regulation FD?For Regulation FD purposes, a reporting company mustbe careful not to disclose material information in anoffering memorandum that is not otherwise publiclydisclosed. Foreign issuers, unlike their US counterparts,are not subject to Regulation FD.6 While this is anapparent advantage for them, they must still be mindful ofthe anti-fraud provisions of the US securities laws. Inaddition, recipients of any material, non-publicinformation disclosed in the offering memorandum oroffering process may want the foreign issuer to disclose theinformation publicly in order to allow them to sell the

securities being offered or any other securities that therecipients may own that would be affected by suchmaterial non-public information. Accordingly, whileRegulation FD does not apply to non-US reportingcompanies, many consider it good practice to complywith, or take actions guided by, its requirements.

Other communication issuesPress releasesIssuers may use a Rule 135c-compliant press release toannounce a Regulation S offering. Under Rule 135c of theSecurities Act, an announcement that an issuer proposes tomake, is making or has made an unregistered offering willnot be deemed to be an offer of securities, for purposes ofsection 5 of the Securities Act, if, among other things, theannouncement contains certain limited informationregarding the offering (e.g. the name of the issuer, the basicterms and size of the offering, the timing of the offering, abrief statement of the manner and purpose of the offeringand statements that the securities have not been registered)and is not used to condition the market in the UnitedStates for the offered securities. A Rule 135c-compliantpress release is not a directed selling effort and thereforewill not affect the availability of the Regulation S safeharbour. In addition, for Regulation S offerings with a Rule 144A

tranche, the SEC has clarified that general solicitation andgeneral advertising in connection with a Rule 144Aoffering will not be viewed as directed selling efforts inconnection with a concurrent Regulation S offering. Thisis particularly relevant because general solicitation andgeneral advertising became permitted for Rule 144Aofferings (so long as the securities are sold to a QIB or to apurchaser that the seller and any person acting on theseller’s behalf reasonably believes is a QIB). As a result,issuers are now permitted to broadly disseminate a pressrelease regarding a proposed or completed Rule 144Aoffering free of the prior restrictions on the types ofpermitted information under Rule 135c.Offering participants should keep in mind that Rule

135c is a non-exclusive safe harbour, and offering-relatedpress releases may be able to satisfy a different safe harbour,such as Rule 135e under the Securities Act in respect ofany offshore activities for a Regulation S tranche. Rule135e provides that, subject to certain conditions, foreignissuers and their representatives will not be deemed to offerany security for sale by virtue of providing any journalistwith access to press conferences conducted outside the US,conducting meetings with issuer or selling security holderrepresentatives outside the US, or providing written press-related materials released (and received by the recipient)



outside the US. Foreign issuers should consult theircounsel in advance of making any communications,whether in or outside the United States, to carefullyexamine the applicability of these safe harbours.

Due diligenceGeneralRule 144A and Regulation S offerings do not subject theissuer and the initial purchasers to liability under section11 of the Securities Act, thereby limiting the potentialneed to establish a formal due diligence defence.Nonetheless, a thorough due diligence investigation bylawyers, accountants, the issuer and the initial purchasersgenerally will result in better disclosure and a lower risk ofliability or potential liability for material misstatements oromissions.

The due diligence processThe due diligence process in Rule 144A and combinedRule 144A/Regulation S offerings is similar to the processfollowed in connection with registered public offerings.Generally, the process is divided into two parts: (a)business and management due diligence, and (b)documentary, or legal, due diligence. The actual extent ofdiligence required may vary based on:• the nature of the issuer, including whether the issuer is anewer entity, a well-established company (whetherpublic or not) or a US reporting company;

• the business of the issuer and its current risk profile; and• the securities to be offered, whether investment grade orhigh yield debt securities (and the ratings, if any, ofsimilar securities of the issuer) or preferred or commonequity.Foreign issuers contemplating an offering to US

institutional investors are expected to comply with, andfacilitate, the due diligence process, including making itssenior management team available for discussions andopening their books and records to the initial purchasers.In order to help establish a due diligence defence, marketpractice generally requires the initial purchasers in Rule144A and Regulation S offerings to condition the closingof the offerings upon receipt of documents similar to thoseused in an underwritten offering, including a comfortletter, legal opinions (including 10b-5 letters) and officercertificates. As with either a registered offering or a Rule144A offering, due diligence will also be affected by theinitial purchasers’ knowledge about, and any ongoingrelationships with, the issuer.

Liability concernsGeneralThe Rule 144A safe harbour and Regulation S areexemptions from the registration and prospectus deliveryrequirements of the Securities Act. However, the anti-fraudprovisions of the securities laws still apply to thesetransactions. Thus, while it is generally believed that Rule144A and Regulation S offerings are not subject to theliability provisions of sections 11 or 12(a)(2) of theSecurities Act, the issuer and the initial purchasers could,under some circumstances, be subject to liability forrescission damages under section 12(a)(1) of the SecuritiesAct for the sale of an unregistered security, as well asprivate rights of action under section 10(b) of theExchange Act and Rule 10b-5 under the Exchange Act formaterial misstatements or omissions.

The anti-fraud provisions of the Securities ActIn general, purchasers of an issuer’s securities in a registeredoffering have private rights of action against variousparticipants in the offering for materially deficientdisclosure in registration statements under section 11 ofthe Securities Act and in prospectuses and oralcommunications under section 12(a)(2) of the SecuritiesAct. Under section 11, liability exists for untrue statementsof material facts or omissions of material facts required tobe included in a registration statement or necessary tomake the statements in the registration statement notmisleading at the time the registration statement becameeffective. Under section 12(a)(2), sellers have liability topurchasers for offers or sales by means of a prospectus ororal communication that includes an untrue statement ofmaterial fact or omits to state a material fact that makes thestatements made, based on the circumstances under whichthey were made, not misleading. In addition, section 17(a)of the Securities Act is a general antifraud provision thatprovides, among other things, that it is unlawful for anyperson in the offer and sale of securities to obtain moneyor property by means of any untrue statement of a materialfact or any omission to state a material fact necessary inorder to make the statements made, in light of thecircumstances under which they were made, notmisleading. Purchasers also may have private rights of action under

section 10(b) of the Exchange Act and Rule 10b-5 underthe Exchange Act. Claims brought under section 10(b)and Rule 10b-5 are implied causes of action covering alltransactions in securities, including private placements,and all persons who use any manipulative or deceptivedevices in connection with the purchase or sale of anysecurities. Courts have held that claims brought under



section 10(b) and Rule 10b-5 require proof that thedefendant acted with scienter (meaning intent orknowledge of the violation), which is not a requirement foractions brought under sections 11 or 12 of the SecuritiesAct.Each of these statutes and rules has many decades of

judicial interpretations explicating their elements anddefences. While the anti-fraud protections often frightenforeign issuers from accessing the US capital markets andlitigation can always be brought, experienced counsel canbe very helpful in guiding issuers and investment banksthrough the process in order to minimise the possibility ofsuch litigation.



ENDNOTES1. The offering participants should also determine

whether any state’s blue sky laws will apply to theproposed offering. For information regarding blue skylaws, see Chapter 11 (Blue sky laws).

2. For more information, see ‘Liability concerns’ below.3. Rule 144A is an exemption from registration under

section 5 of the Securities Act. As stated in PreliminaryNote 1 to Rule 144A, it does not relate to the anti-fraud or other provisions of the US federal securitieslaws.

4. For more information, see ‘Liability concerns’ below.5. The definition of issuer for purposes of Regulation FD

in Rule 101(b) excludes foreign governments andforeign private issuers, each as defined in Rule 405under the Securities Act.

6. For more information, see ‘Liability concerns’ below.



Section 3(a)(2) exempts any security issued orguaranteed by a bank from registration under theSecurities Act. This exemption is based on theprinciple that, whether chartered under state or

federal law, banks are highly and relatively uniformlyregulated, and as a result will provide adequate disclosureto investors about their business and operations, even inthe absence of the federal securities registrationrequirements. Banks are also subject to various capitalrequirements that may help increase the likelihood thatholders of their debt securities will receive timely principaland interest payments.

What is a bank?Section 3(a)(2) broadly defines a bank to mean anynational bank, or any banking institution organised underthe law of any state, territory or the District of Columbia,the business of which is substantially confined to bankingand is supervised by the state or territorial bankingcommission or similar official. To qualify as a bank undersection 3(a)(2), the institution must meet tworequirements: (i) it must be a national bank or anyinstitution supervised by a state banking commission orsimilar authority; and (ii) its business must be substantiallyconfined to banking. Therefore, securities issued by bankholding companies, finance companies, investment banksand loan companies are not exempt from registrationunder section 3(a)(2). Even though many investors maythink of them as banks, their businesses are notsubstantially confined to banking. Securities offered by anyof these institutions must be registered under the SecuritiesAct unless the offering falls under another exemption fromregistration.

Foreign banks and section 3(a)(2)Branches and agencies of foreign banks are operationalarms of foreign banks conducting business in the USunder licences granted either by the Office of theComptroller of the Currency (OCC) or a state authority.However, an agency or branch is not a separate legal entityfrom the foreign bank itself. As a result, a foreign bank maynot be a national bank or may not be organised under the

laws of any state. Therefore, a foreign bank must focus onthe SEC’s definition of a bank under section 3(a)(2).

In Bankruptcy 964, the SEC reviewed the availability ofthe section 3(a)(2) exemption for US branches of foreignbanks, particularly with respect to their day-to-daybanking operations. After review of the issues involved,particularly the comparability of regulation of thesebranches, the SEC was satisfied that the foreign bankbranches in question were subject to the type and extent ofsupervision contemplated by section 3(a)(2) for domesticbanks, and authorised the Division of CorporationFinance to issue no-action letters with respect to the salewithout registration of various instruments. The Divisionthen granted the first no-action letter with respect tocertificates of deposit and passbook accounts issued by aNew York state branch of a foreign bank. Other lettersfollowed.

In 1974, this no-action policy was re-examined. TheSEC reaffirmed its prior position, in part as a policydecision intended to further the principle of nationaltreatment, that foreign and domestic banks should beafforded the same privileges and be subject to the samerules applicable to US banks. In addition, the SECdetermined that the branches and agencies in questionappeared to be subject to regulatory schemes that werevirtually indistinguishable from those to which theirdomestic counterparts were subject.

In 1978, Congress passed the International Banking Act(IBA). Prior to the IBA, the only branches and agencies offoreign banks in the US were those licensed by states.Under the IBA, a foreign bank can establish a federalbranch or agency licensed and supervised by the OCC.Congress enacted the IBA to establish the principle ofparity of treatment between foreign and domestic banks inlike circumstances (the principle of national treatment).The SEC continued to issue many no-action letters toforeign branches, permitting reliance on the section3(a)(2) exemption for their securities.

In 1986, the SEC recognised that the passage of the IBArepresented a congressional public policy of nationaltreatment, and sought to formalise its positions in aninterpretive release.1 For purposes of the exemption from


CHAPTER 6

Section 3(a)(2) and considerations forforeign banks financing in the US


registration provided by section 3(a)(2), the SEC deems abranch or agency of a foreign bank located in the US to bea national bank, or a banking institution organised underthe laws of any state, territory, or the District of Columbia,provided that the nature and extent of federal and/or stateregulation and supervision of the particular branch oragency is substantially equivalent to that applicable tofederal or state chartered domestic banks doing business inthe same jurisdiction. The determination with respect tothe requirement of substantially equivalent regulation, aswell as the determination as to whether the business of thebranch or agency in question ‘is substantially confined tobanking and is supervised by the State or territorialbanking commission or similar official’ is the responsibilityof issuers and their counsel. These determinations aremade with regard to the banking regulations in effect atthe time the securities are issued or guaranteed.

In light of the issuance of this interpretive release, theSEC no longer grants no-action letters regarding securitiesissued or guaranteed by foreign bank branches andagencies. However, the approximately 100 no-actionletters granted under section 3(a)(2) prior to the 1986interpretative release are instructive as to the considerationgiven by the staff of the SEC to the strength of theapplicable regulatory regime, the type of instrument, themanner of offering and the denominations of the securitiesto be offered.

Generally, these no-action letters permitted US branchesand agencies of foreign banks to issue debt securitieswithout registration. Over time, the SEC developed apolicy of conditioning its decision on the receipt of anopinion of counsel that the nature and extent of federaland state regulation and supervision of the branch oragency in question were substantially equivalent to thatapplicable to federal or state chartered domestic banksdoing business in the same jurisdiction.

Securities guaranteed by a bankThe section 3(a)(2) exemption is also available forsecurities guaranteed by a bank. Whether securities areguaranteed by a bank is interpreted broadly by the SEC.The staff of the SEC has taken the position in no-actionletters that the term guarantee is not limited to a guarantyin a legal sense, but also includes arrangements in whichthe bank agrees to ensure the payment of a security. As aresult, many US branches of foreign banks have also issuedletters of credit in connection with the obligations of UScommercial borrowers. Because a letter of credit isconsidered to be a guarantee for the purposes of section3(a)(2), the letter (and the obligations of the underlyingcommercial borrower) are exempt from registration. The

guarantee must be full and unconditional. Guarantees by aforeign bank (other than those by an eligible US branch oragency) would not qualify for the section 3(a)(2)exemption.

Types of securitiesThe exemption under section 3(a)(2) applies not only tosecurities issued or guaranteed by a bank but also tocertificates of deposit issued or guaranteed by a bank (tothe extent considered securities instead of bank deposits).Structured notes linked to the performance of an index oranother underlying asset are also commonly issued bybanks in reliance on the Section 3(a)(2) exemption.2 Inthese instances, even though the return of the note islinked to an underlying asset, the investor is buying debtof the issuer and must rely on the credit of the issuer forrepayment of the note, no matter how the underlying assetperforms. This strengthens the argument that thestructured instrument is covered under the section 3(a)(2)exemption.

Because bank notes are not subject to the SEC’sregistration requirements, structured bank notessometimes are linked to different types of assets thanregistered structured notes, particularly when the investoris sophisticated and understands the relevant risks. Forexample, because bank notes are not subject to the strictliability provisions of Sections 11 and 12(a)(2) of theSecurities Act, an issuer may be more comfortable linkingthe bank note to a complex underlying asset or investmentstrategy, which may be difficult to describe in a registrationstatement. In addition, registered offerings of equity-linked structured notes are typically linked only tolarge-cap US stocks due to the Morgan Stanley no-actionletter3 requirements. However, some bank notes may belinked to debt securities (credit-linked notes), small-capstocks or securities traded only on non-US exchanges.4

Section 3(a)(2) bank notes can be senior orsubordinated, fixed or floating rate, zero-coupon, non-USdollar denominated, amortising, multi-currency orindexed (structured) securities. Common reference ratesfor floating rate bank notes include Libor (LondonInterbank Offered Rate), Euribor (Euro InterbankOffered Rate), the prime rate, the Treasury rate, the federalfunds rate and the CMS (Constant Maturity Swap) rate.5

Section 3(a)(2) bank notes are not considered restrictedsecurities, as would debt securities issued by a bank or itsUS branch under Rule 144A under the Securities Act.Accordingly, section 3(a)(2) bank notes are typicallyeligible for inclusion in indices that measure theperformance of investment grade debt securities. Thisfactor tends to increase their marketability.



OCC registrationNotwithstanding the exemption from SEC registration,the OCC regulates disclosure in connection with offersand sales of securities by national banks and federallylicensed US branches and agencies of foreign banks (butnot state banks). 12 C.F.R. Part 16, the OCC’s SecuritiesOffering Disclosure Rules (OCC Regulations), providesthat these banks may not offer and sell their securities untila registration statement has been filed and declaredeffective with the OCC, unless an exemption applies.Issuers are required to follow the form requirements of theform that they would use to register securities under theSecurities Act if they were not exempt from suchregistration. As a result, many banks seek to utilise anexemption from this registration process.

The OCC Regulations provide an exemption from theregistration requirements if the securities would be exemptfrom registration under the Securities Act other than byreason of sections 3(a)(2) or 3(a)(11), or the securities areoffered in transactions that satisfy one of the followingexemptions under the Securities Act:• Regulation D offerings;• Rule 144A offerings to QIBs; and• Regulation S offerings effected outside of the US.

Amendments to Rule 144A and Rule 506 of RegulationD allow general solicitation or general advertising of offers,provided that the securities are sold only to accreditedinvestors (in the case of Rule 506 offerings) or QIBs (in thecase of Rule 144A offerings). In a Rule 506 offering, theissuer must take reasonable steps to verify that thepurchasers are accredited investors.

Rule 506 now includes disqualification provisions,which prohibit the use of the exemption by certain badactors and felons. These disqualification events apply tothe issuer, persons related to the issuer and anyone whowill be paid (directly or indirectly) remuneration inconnection with the offering (placement agents andothers).

The OCC Regulations also contain an exemption foroffers and sales of nonconvertible debt securities if anumber of conditions are met under Part 16.6, including:• The issuer or its parent bank holding company has a

class of securities registered under section 15(d) of theExchange Act, or, in the case of issuances by a federalbranch or agency of a foreign bank, such federalbranch or agency provides the OCC the informationspecified in Rule 12g3-2(b) under the Exchange Actand provides investors with the information specifiedin Rule 144A(d)(4)(i) under the Securities Act.

• All offers and sales are to accredited investors, asdefined in Rule 501 under the Securities Act.

• The securities are investment grade, as discussedbelow.

• The securities are sold in a minimum denomination of$250,000 and are legended to provide that theycannot be exchanged for securities in smallerdenominations.

• Prior to or simultaneously with the sale of thesecurities, the purchaser receives an offering documentthat contains a description of the terms of thesecurities, the use of proceeds and the method ofdistribution, and incorporates certain financial reportsor reports filed under the Exchange Act.

• The offering document and any amendments are filedwith the OCC no later than the fifth business dayafter they are first used.

The definition of investment grade under Part 16.6 doesnot require a specific rating for the relevant nonconvertibledebt securities. Rather, the condition will be satisfied if theissuer of a security has ‘adequate capacity to meet financialcommitments under the security for the projected life ofthe asset or exposure. An issuer has an adequate capacity tomeet financial commitments if the risk of default by theobligor is low and the full and timely repayment ofprincipal and interest is expected.’ An existing investmentgrade rating could be one factor that offering participantsmay take into consideration in determining whether anissue of debt securities is investment grade for purposes ofthe OCC Regulations.

FDIC guidanceFor state banks and state-licensed branches of foreignbanks with insured deposits, the Federal Deposit InsuranceCorporation (FDIC) adopted a Statement of PolicyRegarding the Use of Offering Circulars in Connectionwith Public Distribution of Bank Securities for state non-member banks (FDIC Policy).6 The FDIC Policy requiresthat an offering circular include prominent statements thatthe securities are not deposits, are not insured by the FDICor any other agency, and are subject to investment risk.The FDIC Policy states that the offering circular shouldinclude detailed prospectus-like disclosure, similar to thetype contemplated by Regulation A under the SecuritiesAct or the offering circular requirements of the Office ofthe Thrift Supervision (OTS).7 While the Dodd-Frankfinancial regulatory reform bill mandated that thesupervisory functions of the OTS be shifted to the OCCand also eliminated the OTS, the FDIC Policy predatesthe Dodd-Frank changes and therefore continues to referto the OTS’s requirements.

The FDIC Policy further states that the goals of thePolicy will be met if the securities are offered and sold in a



transaction that, among other options, satisfies (i) therequirements of Regulation D of the Securities Act relatingto private offers and/or sales to accredited investors; or (ii)the information and disclosure requirements of theregulations of the OTS regarding securities offerings,which require that debt securities be issued indenominations of $100,000 or more. To the extent anoffering meets these requirements, it will be deemed tosatisfy the FDIC Policy requirements. Nonetheless, anissuer may still want to include more detailed disclosure, asthe FDIC Policy emphasises the applicability of the anti-fraud provisions of the Securities Act and Exchange Act toofferings by banks.

Securities liabilitySecurities offered or guaranteed by a bank under section3(a)(2) are not subject to the civil liability provisions undersections 11 and 12(a)(2) of the Securities Act. However,offerings under section 3(a)(2) are subject to section 10(b)of the Exchange Act and the anti-fraud provisions of Rule10b-5 under the Exchange Act. Moreover, investors mayhave a fraud-based cause of action under state common orstatutory law. Therefore, when considering an offeringunder section 3(a)(2), a bank (and its underwriters) musttake into consideration what disclosure is necessary toavoid liability under the anti-fraud provisions, even if thedocument does not need to comply with the specific formrequirements of the SEC or another regulator. As a result,the form and content of bank note offering documentsissued under section 3(a)(2) are similar in many respects tothat used for a registered offering. Also, broker-dealersmust carefully assess the suitability of the relevantinvestors, particularly in the case of offerings of complexproducts.

Blue sky lawsSecurities issued under section 3(a)(2) are consideredcovered securities under section 18 of the Securities Act. Asa result, a state may not require registration or qualificationof section 3(a)(2) bank notes or comment on the relatedoffering document. However, states may require certainnotice filings and charge filing fees in connection with anoffering. Most states do not require registration for banknotes offered by a foreign bank through its US branch oragency under the principles of comity, on the theory thatthe domestic branch or agency is subject to oversight andregulation by US banking authorities. However, it isunderstood that there are a few states, including Texas, thatdo not extend the exemption to US branches or agenciesof foreign banks.

For more information on blue sky laws, see Chapter 11.

Minimum denominationsThe Securities Act contains no requirements regardingminimum denominations for securities issued pursuant tosection 3(a)(2). A review of several no-action letters revealsthat the SEC has not directly conditioned the granting ofany no-action letter on a bank security being issued in adenomination of $100,000 or greater. While issuers haveidentified large denominations in no-action letter requestsas an argument in their favour, the SEC has not issued anystatement indicating that issuances under Section 3(a)(2)are or should be conditioned on compliance with anyminimum denomination requirements, or particular salesrestrictions.

As referred to above, Part 16.6 of the OCC Regulationsprovide an exemption for offerings of non-convertible debtto accredited investors in denominations of $250,000 ormore. Under Part 16.6, each note or debenture must showon its face that it cannot be exchanged for notes ordebentures in smaller denominations and permits sales onlyto accredited investors. The OCC has commented thatthese requirements ‘serve as important investor/consumerprotection tools and foster safe and sound banking rules.’8

Some third party commentary also advocates the issuanceof subordinated debt of banks only in largedenominations.9 The reasoning behind this position is thatsecurities issued in increments in excess of, for example,$250,000 (the insurance limit for deposits) will clearlyindicate to investors that the debt is uninsured and isspecifically subordinated to the bank’s other debts. Notably,securities issued in large increments are generally issued toinstitutional investors who presumably understand that thesecurities are uninsured. Issuances of banks’ securities insmaller denominations marketed to less sophisticated retailinvestors lack a large face value that will put such investorson notice that the securities are not insured.

An agency of a foreign bank subject to New Yorkbanking regulations would have to notify theSuperintendent of the New York Department of FinancialServices of any upcoming transaction. Absent objectionfrom the Superintendent within 30 days of such notice,the agency would be able to sell securities, and only tocertain authorised purchasers in minimum denominationsof $100,000.10

Offering documentsAs a result of the applicable liability provisions describedabove, the offering documentation for bank notes issomewhat similar to that of a registered offering. The formof these documents is not subject to the relevant SEC formrules, and may vary somewhat from those used in aregistered offering. However, the content (as well as the



types of documents incorporated by reference) tends to besomewhat similar.

The principal document used to describe the securitiesand the issuer is an offering memorandum, which may becalled an offering circular. In addition to a detaileddescription of the securities section, an offeringmemorandum will either include a description of theissuer’s business and financial statements, or incorporatethem by reference from the issuer’s publicly availabledocuments in the US or its home jurisdiction.

In addition, the issuer and the selling agents for theseofferings may use a variety of term sheets to offer thesesecurities.

A bank may choose to issue bank notes on a standalonebasis, or to establish a bank note programme if the bankanticipates substantial issuance volume. A bank noteprogramme will function much like other continuousoffering programmes, such as medium-term noteprogrammes. In addition to the disclosure documents, thefollowing documents are typically used to establish a banknote programme:• one or more paying agency agreements with a paying

agent;• a distribution agreement between the issuer and the

selling agents or dealers; and• an administrative procedures memorandum, which

describes the exchange of information, settlementprocedures, and responsibility for preparingdocuments among the issuer, the selling agents, thepaying agent, their respective counsels, and theapplicable clearing system in order to offer, issue andclose each series of securities under the programme.

Additional agreements for a bank note programme mayinclude a calculation agency agreement or a currencyexchange rate agency agreement. Under a calculationagency agreement, the calculation agent, which often is thesame entity as the paying agent, agrees to calculate the rateof interest due on floating rate notes. This type ofagreement also may be used in connection with structurednotes to calculate the returns payable on the note.

In the case of structured notes, a broker-dealer (usually,the arranger or one of its affiliates) is more likely to serveas calculation agent. Under a currency exchange rateagency agreement, an exchange rate agent (again, often thepaying agent) converts the payments made by the issuer onforeign currency-denominated notes into US dollars forthe benefit of US investors.

In addition, at the time a programme is established, theissuer generally is required to furnish a variety ofdocuments to the selling agents, as would be the case in atypical underwritten or syndicated offering:

• officer certificates as to the accuracy of the disclosuredocuments;

• legal opinions as to the authorisation of theprogramme, the absence of misstatements in the offeringdocuments, the applicability of the section 3(a)(2)exemption and similar matters; and

• a comfort letter (or agreed upon procedures letter)from the issuer’s independent auditors.

Depending upon the arrangements between the issuerand the selling agents, some or all of these documents willbe required to be delivered to the selling agents on aperiodic basis as part of the selling agents’ ongoing duediligence process. Some or all of these documents also maybe required in connection with certain takedowns, such aslarge syndicated offerings of bank notes.

Finra requirementsEven though securities offerings under Section 3(a)(2) areexempt from registration under the Securities Act, theoffering documents and distribution agreements for publicsecurities offerings conducted by banks must be filed withthe Financial Industry Regulatory Authority (Finra) forreview under Finra Rule 5110(b)(9), unless an exemptionis available. For purposes of Finra Rule 5110, an offeringof section 3(a)(2) bank notes is a public offering. Oneexemption from filing under Finra Rule 5110 is that theissuer has outstanding investment grade rated unsecurednon-convertible debt with a term of issue of at least fouryears, or that the issuance of non-convertible debtsecurities is so rated.

A slightly different exemption is applicable to anissuance of bank notes in which a broker-dealer affiliate ofthe issuer participates in the offering. That participationconstitutes a conflict of interest for purposes of Finra Rule5121, and occurs frequently when the issuer is part of alarge financial institution with an affiliated broker-dealerparticipating in the offering. If the offering documentshave the prominent conflicts of interest disclosure requiredby Finra Rule 5121 and the securities are either investmentgrade rated or in the same series that have equal rights andobligations as investment grade rated securities, then nofiling under Finra Rule 5110 would be required.Prominent disclosure for purposes of Finra Rule 5121means that the offering document include disclosure onthe front page that a conflict of interest exists, with a cross-reference to the discussion within the offering document,and disclosure in any summary of the offering document.

If there are no outstanding securities of a national bank(including a branch or agency of a foreign bank regulatedby the OCC) in the same series that are rated investmentgrade and have equal rights and obligations as the bank



notes to be issued, the proposed offering is to be issuedunder Part 16.6 of the OCC Regulations and there is aconflict of interest within the meaning of Finra Rule 5121,then the issuer must obtain an investment grade rating forthe offered securities in order to avoid a filing under FinraRule 5110. This would be the case even if the nationalbank has made the investment grade determinationdiscussed above under OCC Registration.

There are other Finra requirements applicable toofferings of section 3(a)(2) bank notes:• Suitability: Finra members selling section 3(a)(2) bank

notes are subject to Finra Rule 2111, the suitabilityrule. Under Finra Rule 2111, a member firm orregistered representative must perform a reasonablebasis suitability determination before recommending atransaction or investment strategy involving a security.A reasonable basis suitability determination isnecessary to ensure that a transaction or investmentstrategy is suitable for at least some investors. Thatdetermination will be more complicated with respectto structured bank notes, as compared to fixed orfloating rate bank notes.

• Communication rules: Under Finra Rule 2210,certain retail communications are subject to approvalby a principal of the member firm prior to first use orfiling with Finra. Institutional communications mustbe subject to a member firm’s written proceduresdesigned to ensure that the communications complywith applicable Finra standards. All membercommunications, including those relating to anoffering of section 3(a)(2) bank notes, must be basedon principles of fair dealing and good faith, must befair and balanced, and must provide a sound basis forevaluating the facts in regard to any particular banknote. The communications may not omit any materialfact or qualification if the omission, in light of thecontext of the material presented, would cause thecommunication to be misleading.

• Trace reporting: Transactions under section 3(a)(2)must be reported through the Trade Reporting andCompliance Engine (Trace).11 All brokers and dealerswho are Finra members have an obligation to reportsection 3(a)(2) transactions to Trace.

ConclusionSection 3(a)(2) provides bank issuers, including branchesand agencies of foreign banks, with the ability to issuedifferent types of securities without registering the offeringwith the SEC. When relying on section 3(a)(2), an issuermust carefully consider the disclosure included in itsoffering document, so as not to subject itself to liabilityunder the anti-fraud provisions of the securities laws andto comply with the regulations and other guidanceadopted by the various banking regulators. Banks seekingto employ industry best practices typically utilisedisclosure, and meet standards, similar to those used in thecontext of registered offerings.



ENDNOTES1. See Securities Issued Or Guaranteed By United States

Branches Or Agencies of Foreign Banks, SEC ReleaseNo. 33-6661 (September 23 1986).

2. In addition to structured bank notes, banks may issuestructured certificates of deposit.

3. See Morgan Stanley & Co. Incorporated, SEC No-action Letter (June 24 1996). Under the terms of theMorgan Stanley letter, an issuer of a debt security(ELN issuer) linked to an underlying common stockonly has to include summary information about theissuer of the common stock (the linked stock issuer),disclosure as to availability of information about thelinked stock issuer and information about theunderlying common stock (generally, the US nationalsecurities exchange on which the common stock islisted and the high and low quarterly sales prices forthe two previous full years), provided that the linkedstock issuer meets certain eligibility requirements.Those requirements are that (1) the linked stock issuerhas a class of equity securities registered under section12 of the Exchange Act and (2) the linked stock issuer(i) is eligible to use Securities Act Form S-3 or F-3 or(ii) meets the listing criteria for issuers of the equitysecurities underlying equity-linked notes that are to belisted on a national securities exchange. If the linkedstock issuer does not meet the eligibility requirements,the ELN issuer would have to include detailedinformation about the linked stock issuer, potentiallyexposing the ELN issuer to liability for the linkedstock issuer’s misstatements or omissions.

4. Needless to say, issuers and distributors of these typesof securities exercise caution in terms of drafting therelevant disclosure documents, and ensuring thesuitability of the relevant investors.

5. As new benchmark rates emerge in the internationalcapital markets, these rates will likely find their wayinto bank note offerings as well.

6. See 61 Fed. Reg. 46808, September 5 1996. Thepolicy was most recently revised in September 1996,and may be found at www.fdic.gov/regulations/laws/rules/5000-500.html#fdic5000statementop

7. These requirements can be found at 12 C.F.R. 563g.8. Federal Register, Vol. 73, No. 80, April 24 2008, at

22228.9. See Statement of the Shadow Financial Regulatory

Committee Meeting (Washington), March 2 2000.10. N.Y. Banking Law § 202-a(1); N.Y. Comp. Codes R.

& Regs. tit. 3, §§ 81.1-3.

11. Trace is the Finra-developed vehicle that facilitates themandatory reporting of over-the-counter secondarymarket transactions in eligible fixed income securities.



http://www.fdic.gov/regulations/


Foreign bank branches in the United States,federally or state-licensed, may exercise bankingpowers, such as accepting certain types ofdeposits.

Before December 19 1991, foreign bank branches couldaccept both retail and wholesale deposits. Starting on thatdate, however, although foreign bank branches may receivedeposits of any size from foreigners, the Foreign BankSupervision Enhancement Act of 1991 (FBSEA)prohibited these branches from accepting or maintainingdeposits of less than the standard maximum depositinsurance amount ($250,000 as of 2018) from US citizensand residents. A grandfathering provision permits insuredfederal branches in existence on the date of Act’senactment to continue accepting insured deposits of lessthan the standard maximum deposit insurance amount.1

Furthermore, after FBSEA, deposits in any foreign bankbranch established after December 19 1991, are notcovered by FDIC deposit insurance.

When is a certificate of deposit a security?A certificate of deposit (CD) is a type of deposit accountwith a bank that typically offers a higher rate of interestthan a regular savings account. Under relevant federaljudicial and regulatory guidance, a CD insured by theFDIC is generally not considered a security under thefederal securities laws and is not subject to the registrationrequirements of federal securities laws.In furtherance of the concept of national treatment, the

SEC has determined for purposes of an exemption fromthe registration requirements of the Securities Act that USbranches of a foreign bank appear to be virtuallyindistinguishable from their domestic counterparts andhave substantially equivalent US federal and stateregulation and supervision as domestic banks.2 However,there are limited circumstances in which courts havecharacterised certain CDs as securities.In Marine Bank v. Weaver,3 the US Supreme Court set

forth the analytical framework for determining whether aCD would be considered a security for purposes of theanti-fraud provisions of the Exchange Act. It focused onthe difference between bank-issued CDs and other long-

term debt obligations. According to the Court, FDIC-insured CDs are afforded protection by the reserve,reporting and inspection requirements of the federalbanking laws. Since holders of these deposits areguaranteed payment of principal by the US government,the Court opined that it was not necessary to provide theadded protections to CD holders that are afforded underthe anti-fraud provisions of the US federal securities laws.However, as a caveat, the Court added that all CDs are notautomatically outside of the definition of security underthe federal securities laws, and that ‘each transaction mustbe analysed and evaluated on the basis of the content of theinstruments in question, the purposes intended to beserved, and the factual setting as a whole.’4

The Court’s holding in Marine Bank set forth arelatively straightforward analytical framework with regardto CDs that was made less straightforward three years later,in Gary Plastics Packaging v. Merrill Lynch, Pierce, Fenner,& Smith.5 In that case, Merrill Lynch had marketedbundled insured certificates of deposit that it obtainedfrom various banks. Merrill Lynch purportedly promisedto maintain a secondary market to guarantee purchasersliquidity for their deposits, and represented to purchasersthat it had reviewed the financial soundness of the issuingbanks.The US Second Circuit Court of Appeals began its

analysis by analogising the CDs offered in Gary Plastics toinvestment contracts. An instrument is an investmentcontract if it evidences: (1) an investment; (2) in acommon enterprise; (3) with a reasonable expectation ofprofits; and (4) profit is to be derived from theentrepreneurial or managerial efforts of others. Due to thefact that the broker’s creation and maintenance of asecondary market was a critical part of its marketingefforts, and permitted investors to make a profit from theseinvestments, the Court held that the CDs were securitiesfor purposes of the antifraud provisions of the SecuritiesAct and the Exchange Act. Consequently, the additionalprotections of those antifraud provisions were deemedappropriate.As one result of this case, while brokers who offer these

products indicate that they may make a secondary market

CHAPTER 7

Bank deposit products versus securities


in them (and in fact many do), these issuances do notinvolve a commitment or an agreement on the part of anybroker to do so.

Blue sky lawsCertificated of deposit are usually not considered securitiesunder the US federal securities laws, as discussed above.However, that view may not apply to an analysis undereach US state’s securities laws (also commonly referred toas blue sky laws).If a particular CD were viewed as a security under the

Securities Act, that CD would be a bank security exemptfrom federal registration under section 3(a)(2). These typesof securities are considered covered securities under section18 of the Securities Act, with respect to which a US state’sregistration or qualification provisions are preempted, andthat US state may not require any particular disclosure inthe offering document relating to the security. However,because bank securities generally are not listed on anational securities exchange, US states may require anotice filing and a fee in connection with an offering ofbank securities.Blue sky laws should be examined to ensure that either

no notice filing or fee is required, or the US state’s existingexemption for securities issued by banks does not require afiling. A US state may not view an agency of a foreignbank, whose securities are eligible for the section 3(a)(2)exemption, as within the US state’s exemption forsecurities issued by banks. Generally, blue sky filings arenot needed in any US state in which CDs or banksecurities are offered.

Structured CDsStructured CDs are investments representing a bankdeposit of a specified amount of money for a fixed periodof time, which have periodic interest payments and/or areturn at maturity that is linked to an underlying asset,such as an equity index, a foreign currency exchange rate,a commodity, or some combination of these. Liketraditional CDs, structured CDs entitle the holder to hisor her principal investment, plus one or more additionalpayments. However, unlike traditional CDs, which usuallypay interest periodically, structured CDs generally pay anadditional payment at maturity based on the underlyingasset. The most common form of structured CDs issued byUS-charted banks is insured by the FDIC but banks mayoffer structured CDs that are not so insured.What sets a structured CD apart from a traditional CD

is its customisable features, limited only to the issuingbank’s imagination (and applicable laws). This allowsinvestors access to a number of investment strategies, as

well as the opportunity to gain upside exposure to a varietyof market measures. While traditional CDs contemplate aspecific fixed or floating rate of income, the incomereceived from structured CDs is mainly derived from theperformance of the underlying reference asset. Here is abasic example of a structured CD:

Bank X issues a certificate of deposit with a two-yearterm and a minimum investment of $1,000. In lieu of afixed interest rate, Bank X has offered to pay an amountequal to the appreciation of the Dow Jones IndustrialAverage Index (DJIA) over that two-year term of thenote. If the DJIA increases by 20% in the two-year timeperiod, Bank X will pay an additional $200 for each$1,000 invested, or $1,200 in total. However, if theDJIA declines, Bank X will only pay out at maturity theprincipal amount invested.In addition, structured CDs may or may not be interest

bearing, and may offer a variety of payment calculations.For example, payments may be calculated using thepercentage increase of the underlying asset based on thestarting level (determined on the pricing date) and theending level (determined before the date of maturity), orpayments may be calculated using the average value of theunderlying asset on a series of observation datesthroughout the term of the structured CD. In addition,the payments may be subject to a cap, or ceiling,representing a maximum appreciation in the value of theunderlying asset. Depending on the terms, a particularseries of structured CDs may also have a participation rate,which represents the leverage or exposure of the structuredCDs to movements in the underlying asset.In short, structured CDs can be designed using many of

the same features as structured notes, with one exception:at minimum, the holder of a structured CD usuallyreceives an amount equal to the principal at maturity. Thisfeature arises largely from the fact that the FDIC takes theposition that, in order to be insurable as a deposit, theholder of the instrument must be entitled to at least thereturn of the principal amount. As a result, regardless ofhow poorly the underlying asset performs, at maturity, aholder will still receive the original investment amount.However, this protection is only available if the investmentis held to maturity.For deposit amounts of structured CDs that are FDIC-

insured, it is important to note that the FDIC insurance islimited to the principal invested and any guaranteedinterest rate, but not the contingent interest. Further,investors are still subject to the direct credit risk of theissuing bank for any dollar amount over the maximumapplicable deposit insurance coverage – for example, if theinvestor holds other deposits with the applicable bank that



together exceed the applicable deposit insurance limit.Another notable aspect of many structured CDs is the

estate feature (otherwise commonly known as a death putor survivor’s option). To the extent provided in the termsof the particular structured CD, if at any time thedepositor of a structured CD passes away (or in some cases,becomes legally incapacitated), the holder’s estate or legalrepresentative has the right, but not the obligation, toredeem the structured CD for the full deposit amountbefore the maturity date, without being subject to anypenalty provisions. The estate or representative also maychoose not to exercise the estate feature and instead holdthe structured CD to maturity.An investment in structured CDs may give rise to a

number of potential risks that investors should be aware ofbefore making an investment. As mentioned above, theprincipal protection feature only applies if a structured CDis held to maturity. Accordingly, an investor must beprepared to commit their investment in a structured CDfor the full term of the structured CD.Depending on the terms of the structured CDs, there

may be no assurance of any return above the depositamount. In the end, if the market measure performsunfavourably, even though the investor may receive areturn of its principal, the investor will still experience anopportunity cost as compared to investing in a traditional,interest-paying CD or another investment. Conversely,even if the market measure performs favorably, dependingon the terms of the structured CD, the return on theinvestment may be limited by a predetermined return, aparticipation rate of less than 100%, or some other termspecific to a particular structured CD. These types offeatures would cause the structured CD to perform lesswell than the relevant underlying asset. Further, forstructured CDs that are FDIC-insured, the premiums andassessments paid by the bank issuer to the FDIC areusually passed on to the investor in the form of a lowerparticipation rate or a lower maximum payment, ascompared to non-FDIC-insured CDs and investments. Inother words, a different investment, such as a non-insuredstructured CD or note with comparable terms, may offergreater upside potential.Some structured CDs may also have a call feature. This

provision allows the issuing bank, at its option, to redeemthe structured CDs at a specified call price on one or morecall dates prior to maturity. By agreeing to a specified callprice, the investor effectively forgoes any possible returnsthat could be realised had the structured CD not beencalled, or had the structured CD been called on a laterdate. In addition, if a structured CD is called, the investormay not be able to reinvest the proceeds in a similar

instrument, since interest rates and the level of theunderlying asset may have changed since the structuredCD was initially purchased.Finally, structured CDs are not liquid investments.

Issuing banks rarely create a secondary market forstructured CDs, and even if a secondary market is created,the issuing banks are under no obligation to maintain it.As a result, if an investor decides to sell their structuredCD prior to maturity, the amount the investor receivescould potentially be lower than the initial principalamount.Although structured and other CDs may not be

considered securities for purposes of the registrationprovisions of the Securities Act, as discussed above under‘When is a certificate of deposit a security?,’ a court couldview a structured CD as subject to the anti-fraudprovisions of the Exchange Act. Consequently, issuers ofstructured CDs generally include in their offeringdocuments disclosure about the issuer and the productthat is in many respects similar to the disclosure in aregistered offering of a similar structured security.



ENDNOTES1. Section 335(a) of the Dodd-Frank Wall Street Reform

and Consumer Protection Act amended section11(a)(1)(E) of the Federal Deposit Insurance Act (12U.S.C. § 1821(a)(1)(E)) to increase the standardmaximum deposit insurance amount from $100,000to $250,000.

2. See SEC Release No. 33-6661 (September 23 1986).3. 455 U.S. 551 (1982).4. Id. at 560, n.11.5. 756 F.2d 230 (2d Cir. 1985).




Foreign issuers may also access the US capitalmarkets by issuing commercial paper (CP), ashort-term, non-convertible debt typically issuedby US and non-US banks, financial companies

and other large, investment grade companies. Commercialpaper issuers typically establish CP programmes to allowfrequent, often daily, issuances on short notice. Theseprogrammes are similar to MTN programmes, where themain programme documentation, due diligence anddeliverables are provided upon the CP programme’sestablishment. Commercial paper is not registered underthe Securities Act and may be issued pursuant to theexemption from registration under section 3(a)(3) of theSecurities Act. However, CP can also be issued withoutregistration in a private placement pursuant to section4(a)(2) of the Securities Act using the resale exemptionprovided under Rule 144A of the Securities Act.

What is commercial paper?CP is a promissory note with a maturity of nine months orless, although typically with a maturity of 30 days or less.It is generally unsecured, issued in large denominations($100,000 or more) and sold in book-entry form at adiscount from face value. Although CP typically is issuedas a non-interest bearing security, it is sometimes offered ininterest bearing form. As a result of its unregistered nature,CP is mainly purchased by institutional investors,including money market funds, insurance companies andbanks. Purchasers are almost always either QIBs orinstitutional AIs (IAIs).CP is an attractive funding instrument because it

provides short-term liquidity and can be rolled over atmaturity. Issuers generally use the proceeds of CP issuancesto fund short-term liquidity needs, as an alternative toshort-term borrowing under lines of credit from banks,including revolving credit facilities. Issuers usually roll overtheir CP, which means they repay maturing CP with theproceeds of new issuances.In order to meet their payment obligations in the event

of a disruption in the CP market, issuers maintainundrawn, revolving credit facilities or bank letters of creditin amounts equal to the maximum amounts of CP issuable

under their programmes. Issuers will not borrow underthese credit facilities unless they are unable to repaymaturing CP with new issuances or other available cash. In those instances where a CP issuer obtains a bank letter

of credit, the CP and the bank letter of credit will beexempt from registration under the exemption provided bysection 3(a)(2) for bank-issued securities. A letter of creditis an unconditional obligation of the issuing bank to payout of its own funds maturing CP, in exchange for a feewhich is a certain percentage of the amount of CP issued.Most letters of credit are direct-pay (i.e. the letter of creditbank pays the CP holders and the issuer or the issuer’sparent reimburses the letter of credit bank pursuant to areimbursement agreement). The other type of letter ofcredit is a stand-by letter of credit. Under a stand-by letterof credit, the letter of credit bank must pay only in theevent that the issuer does not. Due to certain negative caselaw, the short-term nature of CP and the expectation ofCP investors to quickly receive interest, if applicable, andprincipal payments, a stand-by letter of credit is not aspopular with CP investors as a direct-pay letter of credit.Banks that enter the CP market often do so by creating

a subsidiary to act as issuer under a CP programme, inwhich case the parent bank provides back-stop financingor serves as guarantor. Although the majority of CP issued by operating

companies is unsecured, CP can also be asset-backedcommercial paper (ABCP), in which case a bankruptcy-remote SPV or conduit is established to act as the issuer.The SPV uses the proceeds of an ABCP issuance primarilyto purchase interests in various types of assets. Repaymentof the ABCP issued by the conduit depends primarily onthe cash collections received from the assets purchased andthe conduit’s ability to issue new ABCP. Typically, a bankor other financial institution will provide liquidity supportto bridge the situation where maturing ABCP cannot befinanced by the issuance of new ABCP due to a marketdisruption. Some common assets financed with ABCPinclude trade receivables, consumer debt receivables, andauto and equipment loans and leases. An ABCP conduitmay also use the proceeds to invest in securities (includingasset- and mortgage-backed securities, corporate and

CHAPTER 8

Considerations related to commercial paper


government bonds, and CP issued by other entities), andto make unsecured corporate loans.

Exemptions from registration for CPBecause of its short-term nature and frequent issuance, itis not practical to register CP under the Securities Act.Consequently, CP is issued pursuant to the exemptionfrom registration under section 3(a)(3) or in a privateplacement pursuant to section 4(a)(2) using the resaleexemption provided under Rule 144A. As such, a CPprogramme is usually structured as a section 3(a)(3)programme or a Rule 144A programme. In addition, CPcan also benefit from the exemption provided by section3(a)(2) of the Securities Act for securities that are eitherissued or guaranteed by a bank or supported by a letter ofcredit from a bank.

Section 3(a)(3) exemption requirementsSection 3(a)(3) itself is brief and exempts from registration‘any note, draft, bill of exchange or banker’s acceptancewhich arises out of a current transaction or the proceeds ofwhich have been or are to be used for current transactions,and which has a maturity at the time of issuance notexceeding nine months, exclusive of days of grace, or anyrenewal thereof the maturity of which is likewise limited’.An SEC interpretive release and subsequent SEC no-action letters have established the following four criteriathat must be satisfied:The CP should:

• be prime quality and negotiable;• be a type not ordinarily purchased by the general public;• be issued to facilitate current transactions; and• have a maturity not exceeding nine months.The prime quality requirement has customarily been

satisfied on the basis of ratings of the CP by nationallyrecognised rating services.1 Such ratings depend on thecreditworthiness of the issuer (or the guarantor, if any). Ifthe CP is unrated or less than investment grade, then theissuer could obtain a committed back-up bank facility,although it is unclear whether the SEC would issue a no-action letter permitting this arrangement. Alternatively, ifthe CP is unrated, the sponsoring dealer could provide aletter to issuer’s counsel stating that in such dealer’s viewthe CP would, if rated, be given a prime rating and thatissuer’s counsel may use such letter as the basis for opiningthat the CP is entitled to the section 3(a)(3) exemption.With respect to the requirement that the CP be of a type

not ordinarily purchased by the general public, the relevantfactors are denomination, type of purchaser and manner ofsale. The minimum denominations described in SEC no-action letters are typically $100,000, although in practice

CP is usually sold in much higher denominations.Purchasers of CP usually are required to be institutionalinvestors or sophisticated individuals who would qualify aspurchasers in a section 4(a)(2) private placement and SECno-action letters often refer to sales to institutions orindividuals who normally purchase commercial paper. Themarketing of CP also should be clearly aimed at suchpurchasers and advertising in publications of generalcirculation should generally be avoided. However, the SEChas not objected to tombstone advertisements announcingsection 3(a)(3) programme establishments or limitedadvertisements in publications of general circulation.The requirement that the CP have a maturity not

exceeding nine months can be satisfied by limiting thepermitted maturity to 270 days in the documentationestablishing the CP programme. Demand notes and noteswith automatic rollover, extension or renewal provisionsthat extend maturity past the 270-day mark would notmeet this requirement.The current transactions requirement has been the

subject of the majority of the SEC no-action lettersregarding section 3(a)(3). For corporate issuers, using CPto finance inventory or accounts receivable financing,recurring or short-term operating expenses, such as thepayment of salaries, rent, taxes, dividends or generaladministrative expenses and the interim financing ofequipment or construction costs, pending permanentfinancing, for a period no longer than one year will satisfythe current transaction requirement.In those cases where it is not possible to trace the

application of proceeds to particular uses, the SEC hasaccepted the use of limits on the amount of CP to beissued according to formulas based on various categories ofcurrent transactions. The more expansive of these formulasinclude limiting the amount of CP outstanding at any onetime to not more than the aggregate amount utilised by theCP issuer for specified current transactions, including incircumstances where the proceeds are loaned or advancedto a guarantor or its subsidiaries. The SEC also hasindicated that a CP issuer use a balance sheet test fordetermining such CP capacity whereby the issuerdetermines the capital it has committed to current assetsand the expenses of operating its business over thepreceding 12-month period. The principal use of proceedsthat clearly do not qualify for current transaction statusinclude financing the purchase of securities, whether inconnection with a takeover, for investment purposes or asissuer repurchases, capital expenditures such as thepurchase of land, machinery, equipment, plants orbuildings, and the repayment of debt originally incurredfor an unacceptable purpose.



The section 3(a)(3) exemption is an exemption for theCP notes themselves. Therefore, if the conditions are met,there is no need for the issuer or secondary market resellersto ensure that each sale or presale of CP notes qualified asa private placement in accordance with the Securities Act.Consequently, section 3(a)(3) programmes are oftenpreferred to section 4(a)(2) programmes. However, issuersoften are unable to use the section 3(a)(3) exemptionbecause they plan to use the proceeds for purposes that donot clearly meet the current transactions requirement orthe CP will have a maturity longer than nine months.Some issuers maintain simultaneous section 3(a)(3)programmes and section 4(a)(2) programmes, and issueCP under a section 4(a)(2) programme when raisingmoney for the purchase of a fixed asset or for takeoverfinancing. In such cases, the SEC has issued no-actionletters to the effect that it will not apply the integrationdoctrine to the CP issuances so long as the purposes aredistinct the proceeds of the two programmes aresegregated.

Section 4(a)(2) exemption requirementsSection 4(a)(2) programmes are structured so that the saleof the CP notes by the issuer (either to the dealers asprincipal or directly to purchasers) is exempt fromregistration under section 4(a)(2) or the safe harbourprovided by Rule 506 under Regulation D. Under Rule 506(b) of Regulation D, an issuer can be

assured it is within the section 4(a)(2) exemption bysatisfying the following standards:• The issuer cannot use general solicitation or advertisingto market the securities.

• The issuer may sell its securities to an unlimited numberof accredited investors and up to 35 other purchasers (allnon-accredited investors, either alone or with apurchaser representative, must be sophisticated).

• The issuer must decide what information to give toaccredited investors, so long as it does not violate theanti-fraud prohibitions of the federal securities laws (butthe issuer must give non-accredited investors disclosuredocuments that are generally similar to, but briefer than,those used in registered offerings, which in some casesmay need to be certified or audited by an accountant,and if the issuer provides information to accreditedinvestors, it must make this information available tonon-accredited investors as well).

• The issuer must be available to answer questions byprospective purchasers.Resales by the dealers to QIBs (or purchasers that the

dealers and any persons acting on the dealers’ behalfreasonably believe to be QIBs) are exempt under the safe

harbour of Rule 144A. Resales by the dealers to AIs areexempt under the so-called section 4(a)(1½) exemption.In addition, resales of CP by dealers (including dealers nolonger acting as underwriters with respect to such CP) toIAIs are exempt under the dealer exemption under section4(a)(3) of the Securities Act.

Information requirementsBecause resales by the dealers and secondary markettransfers rely on Rule 144A, a section 4(a)(2) programmeissuer (or a guarantor) of a section 4(a)(2) programme,must comply with the information requirements of Rule144A(d)(4). Section 4(a)(2) programme issuers undertaketo comply with these requirements by including suchinformation in the private placement memorandum(PPM) for the programme. However, public companieswill automatically comply if they continue to file reportsunder the Securities Exchange Act of 1934, as amended(Exchange Act). Section 4(a)(2) programme PPMstypically include language offering purchasers theopportunity to ask questions of, and receive answers from,the issuer/guarantor about the terms and conditions of theoffering or generally about the company and when sales aremade to AIs under Regulation D such an offer is requiredin accordance with Rule 502(b)(2)(v) under Regulation D.

Why would an issuer choose a section 4(a)(2) pro-gramme?An issuer may decide to structure its CP programme as asection 4(a)(2) programme in order to avoid the currenttransactions test and the 270-day limitation on maturityunder section 3(a)(3). An issuer of CP under a section4(a)(2) programme can use the proceeds for any purpose,including to finance capital expenditures or acquisitions orto refinance existing debt originally incurred for thesepurposes (subject to Regulation T restrictions, which wediscuss below). The CP notes issued under a section4(a)(2) programme also are not subject to the 270-daymaturity limitation, although their maturity will still belimited by marketability and by concerns under theInvestment Company Act. Though a section 4(a)(2)programme would not be subject to the 270-day maturitylimitation of section 3(a)(3), the maturity of CP rarelyexceeds 397 days. Any CP with a longer maturity isgenerally not marketed, in part because money marketfunds (which are major purchasers of CP) are restrictedunder Rule 2a-7 under the Investment Company Act frompurchasing notes with maturities exceeding 397 days.Limiting the CP’s maturity to 270 days, however, canprovide the issuer with an exemption from registrationunder the Investment Company Act.



It is not uncommon for issuers to convert section 3(a)(3)CP programmes to section 4(a)(2) programmes,particularly if the issuer would like to use the CPprogramme to fund an acquisition. In such a case, there isa concern with avoiding integration of the resulting section4(a)(2) programme with the issuer’s other offerings andprogrammes. However, this concern is addressed bycovenants in the dealer agreement whereby the CP issueragrees for a six-month period to use CP proceeds forcurrent transactions and to issue CP with maturities ofnine months or less. Some issuers also simultaneouslymaintain a section 3(a)(3) programme and a section4(a)(2) programme. In such a case, there has to be carefulsegregation of the proceeds of each programme and the useof proceeds of each programme needs to be distinct due tothe current transactions requirement under section 3(a)(3).

Disadvantages of a section 4(a)(2) programmeThe drawbacks to a section 4(a)(2) programme are mostlydue to the fact that section 4(a)(2) CP notes, unlikesection 3(a)(3) CP or section 3(a)(2) CP, are restrictedsecurities. As a result, each resale must be exempt fromregistration because CP notes sold in a section 4(a)(2)programme are privately placed. Each resale of the CP,including each resale by a purchaser in the secondarymarket, must be made in a transaction exempt from theregistration requirement. However, the practical impact ofthis is somewhat lessened due to the fact that investorsoften hold CP until maturity and the Rule 144A marketprovides significant liquidity. As a result, in section 4(a)(2)programmes, the PPM will specify that purchasers canresell their CP only to QIBs under Rule 144A or to theissuer or a programme dealer. The issuer or dealers canresell CP they reacquire using the same exemption used inthe original sale, if desired. In addition, section 4(a)(2) CPis generally sold in larger minimum denominations thansection 3(a)(3) CP ($250,000 rather than $100,000) inrecognition of the heightened need to limit the types ofacceptable purchasers.The documentation for a section 4(a)(2) programme

also requires additional language regarding the section4(a)(2) exemption. For example, the PPM, dealeragreement and master note all include selling restrictionsand restrictive legends. The PPM and master note alsoinclude deemed representations of the purchasers of theCP, while the dealer agreement contains customaryrepresentations and covenants typically found inRegulation D and Rule 144A offerings.Finally, Regulation T of the Federal Reserve Board

restricts broker-dealers from extending unsecured credit ifthe proceeds are used to buy, carry or trade in securities. A

broker-dealer’s purchase of restricted securities as principal,which can occur under a section 4(a)(2) programme, issubject to Regulation T, which imposes limitations on theuse of proceeds. The form dealer agreement of theSecurities Industry and Financial Markets Association(SIFMA) for section 4(a)(2) programmes containsprocedures for addressing this issue, mainly by requiringthe CP issuer to notify the dealers if it will or may use theproceeds to purchase or carry securities.

Rule 144A exemption requirementsOften issuers have not relied on Rule 144A in order thatprivately placed CP could be sold to purchasers who arenot QIBs. Instead, Regulation D was used to permit salesto AIs. However, if the CP is sold to QIBs, then CP issuersmay structure their programmes so that dealers may useRule 144A for sales of CP so long as the otherrequirements of Rule 144A are met, which include thefollowing:• The reseller (or any person acting on its behalf ) takingreasonable steps to ensure that the buyer is aware thatthe reseller may rely on Rule 144A in connection withthe resale.

• The CP resold :(a) when issued was not of the same classas securities listed on US national securities exchange orquoted on a US automated inter-dealer quotationsystem; and (b) are not securities of an open-endinvestment company, unit investment trust, or face-amount certificate company that is, or is required to be,registered under the Investment Company Act.

• In the case of a CP issuer that is neither an Exchange Actreporting company, nor a foreign issuer exempt fromreporting pursuant to Rule 12g3-2(b) of the ExchangeAct, nor a foreign government, the holder and aprospective buyer designated by the holder must havethe right to obtain from the CP issuer and must receive,upon request, certain reasonably current informationregarding the CP issuer.The documentation for a Rule 144A programme also

will be very similar to a section 3(a)(3) programme (forexample, offering memorandum, dealer agreement, issuingand payment agent agreement, master note and the like).This means that a section 3(a)(3) programme could beconverted over to a Rule 144A programme with relativeease.2

Establishing a CP programmeIn order for CP to qualify for the exemption under section3(a)(3), and generally to be marketable, it must be highlyrated, and therefore only investment grade issuers issuesection 3(a)(3) CP. This explains why section 3(a)(3) CP is



typically issued by US and non-US financial companies,banks and bank holding companies and other large blue-chip companies, or subsidiaries of these companies.Non-US investment grade issuers who want to issue USCP often form a US corporate subsidiary to act as theissuer under a CP programme. For the subsidiary’s CP tobenefit from the parent’s credit ratings, the parentguarantees the CP, which means that that the parent isparty to all the main programme documents.Issuers of CP can market directly to investors but most

choose to use the services of dealers. Commercial paperprogrammes, like MTN ones, may include more than onedealer. In a CP programme with more than one dealer, onedealer may take the lead in negotiating documents andadvising the issuer, but that dealer will generally not takeon a formal title (such as arranger). In section 4(a)(2)programmes, dealers are sometimes referred to asplacement agents.In order to establish a CP programme, the issuer will

need an issuing and paying agent (IPA), which is a third-party trust company or bank that serves a functionsomewhat like a trustee under an indenture. The IPA playsvarious roles under a CP programme, includingcoordinating settlement of CP notes with DTC,processing payments under CP notes, assigning CUSIPnumbers to each issuance of CP and acting as custodian ofthe master note representing the CP issued under theprogramme.CP issuers (and guarantors) are expected to deliver legal

opinion letters to the dealers when a CP programme isestablished. Typically, outside New York counsel deliversmany of the required opinion paragraphs, while in-houseand/or local counsel qualified in the issuer’s or guarantor’sjurisdiction deliver others. Dealers and IPAs typically donot hire their own counsel for CP programmes. Moreoften, CP dealers instead rely on the opinion delivered tothem by issuer’s counsel, in contrast to other types ofofferings (for example, term securities under Rule144A/Regulation S offerings, section 4(a)(2) privateplacements and section 3(a)(2) offerings). To the extent anIPA’s internal policy requires a legal opinion on certainpoints, issuer’s counsel usually allows the IPA to rely onissuer’s counsel’s opinion to the dealers. However, for a CPprogramme with unique features or where the standardform documents are expected to be negotiated for otherreasons, the dealers and the IPA may hire separate outsidecounsel.

Documentation for a CP programmeThe documents used in a CP programme are fairlystandardised. They are generally not heavily negotiated

compared to the documents for other kinds of capitalmarkets transactions. Key documents are the PPM, thedealer agreement, the issuing and paying agent agreement,the master note, the guarantee, if any, and the legalopinions.

Private placement memorandum The PPM is the main offering document for a CPprogramme. CP PPMs are much shorter than theprospectuses used in registered offerings and the offeringmemoranda used in other unregistered offerings because,due to the short-term nature of CP, investors rely mainlyon the credit ratings of the CP issuer or guarantor, ratherthan disclosure, when deciding whether to purchase. Thisis due to the short-term nature of CP and to the fact thatCP must be highly rated to be marketable. Nevertheless,CP PPMs incorporate by reference or include the publiclyavailable or filed disclosure of the issuer and/or guarantorfor the benefit of investors. In addition, CP PPMs typicallyinclude language stating that purchasers will have theopportunity to ask questions of, and receive answers from,the issuer.A typical CP PPM includes a very short description of

the CP issuer and/or guarantor. The rest of the PPMdescribes the CP notes themselves, including the ratings,denominations, as well as the relevant exemption fromregistration and the use of proceeds. A brief sectiondescribing the tax treatment of payments under the CPmay be included, particularly if the CP issuer or guarantoris a non-US entity. In a section 4(a)(2) programme, thePPM also will include the deemed representation of thepurchasers that they are AIs and the limitations on transferof the notes. Similarly, in a Rule 144A programme, theoffering memorandum also will include the deemedrepresentation of the purchasers that they are QIBs. Theactual terms of a CP note are disclosed in a confirmationof purchase.CP programmes may have one or more dealers. If there

is more than one dealer, the CP issuer is generally expectedto provide each dealer with a customised version of thePPM with only that dealer’s name on the cover. This is incontrast to other types of securities offerings, where thenames of all the dealers or investment banks appeartogether on the cover of the offering document.

Dealer agreementThe dealer agreement (also sometimes called theplacement agreement in a section 4(a)(2) or Rule 144Aprogramme) governs the relationship between the CPissuer and the dealers for the duration of the CPprogramme and sets the manner of sale of CP to or



through the dealers. The dealers’ role is to locate investorsand to advise the CP issuer regarding potential investorsand offering procedures. The dealers also coordinate withthe ratings agencies as most CP is rated by rating agencies.SIFMA has published model dealer agreements for

section 3(a)(3) programmes and section 4(a)(2)programmes.3 These model agreements include forms oflegal opinion letters and include explanatory notes. Eachdealer though usually has its own standard form of dealeragreement in the same way that each underwriter has astandard form of underwriting agreement. A typical dealeragreement provides for the purchase of CP as principal oras agent, includes CP issuer representations, warrantiesand covenants, requires certain deliverables to be providedat signing, includes undertakings by the CP issuer toinform the dealers of material developments and providesfor the CP issuer’s indemnification of the dealers forcertain losses related to the PPM. If a CP programme hasmore than one dealer, the CP issuer typically enters into aseparate dealer agreement with each dealer.The dealer agreement typically allows the parties to

agree, on an issuance-by-issuance basis, either for thedealers to purchase CP notes from the issuer as principal(which is similar to a firm commitment underwriting) orfor the dealers to simply arrange for sales from the issuer topurchasers. However, most dealers act as principal inpurchasing CP from the issuer and reselling the CP toinvestors. Investors usually hold CP to maturity, butdealers may provide liquidity to their clients byrepurchasing the CP prior to maturity. The issuercompensates the dealers for acting as principal or agent bypaying them a fee based on the amount of CP purchasedby the dealers. Alternatively, dealers may be compensatedthrough a reselling commission.The dealer agreement also contains representations,

warranties and covenants by the CP issuer that are deemedto be made on the date the CP programme commences,and again each time CP is issued or the PPM is amended.The representations, warranties and covenants, amongother things, establish the factual basis for the relevantregistration exemption, confirm the accuracy of the PPMand confirm the due corporate existence of the CP issuer(and guarantor) and the due authorisation, execution andenforceability of the CP programme documents.Upon signing, the dealer agreement also requires the CP

issuer to deliver certificates and legal opinion letters, aswell as executed versions of the other CP programmedocuments. The CP issuer also agrees to indemnify thedealers for losses arising from material misstatements oromissions in the PPM (which may include the CP issuer’spublic filings and other public information included or

incorporated by reference in the PPM) and from theissuer’s breach of a representation, warranty or covenant inthe dealer agreement, including any CP issuer action thatmay invalidate the relevant registration exemption.

Issuing and paying agent agreement (IPAA)The IPAA governs the relationship between the CP issuerand the IPA. For instance, it specifies how the CP issuerand the IPA will communicate about CP issuances and thetiming of those communications, specifies the amount ofthe IPA’s fees and contains representations, warranties andindemnification provisions designed to protect the IPAfrom liability to the CP purchasers. Each IPA has apreferred form of IPAA which contains standard terms thatare usually market standard and non-controversial.

Master noteThe CP issued under a CP programme is typicallyrepresented by a single master note, registered in the nameof Cede & Co., as nominee for DTC, and held by the IPAas custodian for DTC. DTC makes available a standardform of master note for corporate CP. Most CPtransactions are settled in book-entry form through DTC’smoney market instrument (MMI) programme and mostCP is identified by a CUSIP number. DTC provides thedealers with a record of the transactions and the dealersprovide investors with trade confirmations. Secondarymarket trades also are settled in book-entry form throughthe facilities of DTC.Unlike a global note, which represents just one issue of

securities (or a portion of one issuance that exceeds $500million), a master note can represent all issuances under aCP programme. The terms of each CP issuance arerecorded in the IPA’s records. Those records arecontinuously updated by the IPA as CP matures and newCP is issued. DTC’s master note form allows theattachment of riders, and typical riders include legendsrequired for the relevant registration exemptions (in thecase of a section 4(a)(2) programme or a Rule 144Aprogramme) and, where a programme contemplatesinterest bearing CP notes, details regarding interestcalculations and procedures for interest payments.

GuaranteeWhen an investment grade issuer establishes a CPprogramme through a subsidiary (as is often the case forforeign issuers wishing to access the US market), the CPissued by the subsidiary is guaranteed by the parent. Theparent executes a stand-alone guaranty. The SIFMA formdealer agreements for guaranteed CP include guarantyforms, which dealers are typically reluctant to negotiate.



Legal opinionsPursuant to the dealer agreement, before CP can be issued,counsel to the issuer and, if applicable, the guarantor mustdeliver legal opinions to the dealers. The SIFMA dealeragreement forms include forms of these opinions. Theopinion paragraphs are often given by some combinationof New York outside counsel, in-house counsel and outsidecounsel qualified in the jurisdiction of the CP issuerand/or guarantor. The opinions typically include opinionparagraphs on: (1) the corporate existence of the CP issuerand/or the guarantor; (2) the due authorisation, executionand enforceability of the CP programme documents; (3)the exemption from registration of the CP notes under theSecurities Act; (4) the CP issuer not being an investmentcompany under the Investment Company Act; (5) theabsence of foreign withholding tax; and (6) the pari passuranking of the CP.

Other considerationsExemptions under the Investment Company ActWhen foreign issuers enter the US CP market, they oftendo so by forming a US corporate subsidiary to act as theCP issuer under the CP programme and lend the proceedsto the parent. In such cases, it is likely that the CP issuerwill fall within the definition of an investment companyunder the Investment Company Act. Therefore, the CPissuer will need to avail itself of an applicable exemptionfrom registration under the Investment Company Act.Some common exemptions used for CP issuance includeRule 3a-5 (an exemption for certain finance subsidiaries)and Rule 3a-3 (available only if the CP issuer has onlyshort-term securities with maturities of 270 days or lessoutstanding). Sections 3(c)(1) and 3(c)(7) of theInvestment Company Act also provide exemptions forissuers that issue only short-term CP. However, use ofsections 3(c)(1) or 3(c)(7) may raise considerations underthe Volcker Rule. In addition, in order to establish theseexemptions, both the subsidiary and the foreign parentmust meet certain requirements. In order to deliver anopinion on investment company status, counsel for the CPissuer often must analyse the parent’s unconsolidatedfinancial statements and obtain back-up certificatesconfirming certain facts. Because these considerations canrequire structural changes to the CP programme andinvolve significant administrative efforts for the CP issuer,they should be discussed as early as possible in the processfor establishing the CP programme.

Foreign withholding taxDepending on the home jurisdiction of the CP issuerand/or guarantor, foreign withholding tax requirements

may apply to CP payments. Foreign and US tax counselshould be involved in the planning stages of the CPprogramme establishment when a foreign issuer orguarantor is involved. This is particularly true whendealing with jurisdictions where at-source withholding taxrelief is available only through investor certifications.

Amendments to Rule 2a-7Money market funds, which have traditionally been majorpurchasers of CP, had previously been subject torestrictions under Rule 2a-7 under the InvestmentCompany Act that limited their ability to invest insecurities that are not in the two highest rating categories.In March 2011, the SEC proposed amendments to Rule2a-7 to remove references to credit ratings. Theamendments were intended to implement the provisionsof the Dodd-Frank Wall Street Reform and ConsumerProtection Act of 2010 (Dodd-Frank Act), specificallysection 939A, which is designed to reduce reliance oncredit ratings in response to the financial crisis of 2008.The SEC re-proposed these amendments in July 2014 andadopted them in September 2015. Under theamendments, money market fund boards (or theirdelegates) must determine that portfolio securities haveminimal credit risk and apply a four-pronged test insteadof relying in part on objective standards, such as creditratings. In addition, other money market reforms,including the requirement of a basis point floating netasset value (NAV) per share on institutional prime and tax-exempt money market funds and the imposition ofliquidity fees and redemption gates, which were adopted inJuly 2014, have resulted in money market funds movingaway from CP in order to improve liquidity. Since theeffectiveness of these money market reforms in October2016, approximately $1 trillion of funds have moved awayfrom CP, which is significant given that the size of themoney market fund industry is approximately $2.6 trillionaccording to Bloomberg Markets.The amendments to Rule 2a-7 also included the removal

from the rule’s issuer diversification requirement theexclusion for securities that are guaranteed by a non-controlled person. Accordingly, a money market fund isrequired to limit its investments in securities of a non-governmental issuer to no more than five percent of themoney market fund’s total assets, regardless of whether ornot the security is guaranteed by a non-controlled person.




OfferingExemption

Section 3(a)(3)

Section 4(a)(2)

Requirements

CP must:• be of prime

quality andnegotiable;

• be of a type notordinarilypurchased bythe generalpublic;

• be of a typeeligible fordiscounting byFederalReserve banks;

• have a maturitynot exceedingnine months;and

• be issued tofacilitatecurrenttransactions.

• Cannot usegeneralsolicitation.

• Dealers mustresell securitiesto QIBs.

• Issuer must beavailable toanswerquestions byprospectivepurchasers.

• Financialinformationmust befurnished underRule144A(d)(4).

Advantages

• CP is notrestricted.

• No need for theissuer orsecondarymarket resellersto ensure thateach sale ofCP is a privateplacement.

• Can usegeneralsolicitation.

• No currenttransactionsrequirement.

• Can have amaturity longerthan ninemonths.

Disadvantages

• Must satisfy thecurrenttransactionsrequirement.

• Cannot have amaturity longerthan ninemonths.

• CP is restricted(althoughresalespermitted underRule 144A).

• Cannot usegeneralsolicitation.

• Potentialintegration withother privateplacements.

Investors

Institutional moneymarket investors

Institutional moneymarket investors

Listing

None

None

Settlement

DTC

DTC

Comparison of section 3(a)(3) programmes and section 4(a)(2) programmes


ENDNOTES1. Standard & Poor’s, Moody’s and Fitch utilise three

generic short-term ratings, which apply to CP, inorder of credit quality from high to low: tier-1, tier-2, and tier-3. Standard & Poor’s and Fitch have alsoused a plus (+) with respect to their tier-1 rating todenote overwhelming safety. Since the analyticalapproach in assigning a short-term rating is virtuallyidentical to the one followed in assigning a term debtrating (i.e. medium-term note and/or long-termbond), a strong link or correlation between an issuer’sshort-term and term debt ratings has evolved for therating agencies, as follows:

Term rating CP rating AAA to AA Tier-1+ AA- to A Tier-1 A- to BBB Tier-2 BBB- and lower Tier-3 and lower

2. For more information regarding Rule 144A, seeChapter 5 (Mechanics of a Rule 144A/Regulation Soffering). A conversion of a section 3(a)(3)programme must be handled with care to avoid anintegration problem.

3. These forms are available atwww.sifma.org/services/standard-forms-and-documentation/corporate-credit-and-money-markets/.



http://www.sifma.org/services/standard-forms-and-documentation/corporate-credit-and-money-markets/



Foreign companies realise a number of benefits bybeing a public company in the US. Thesebenefits include increased visibility and prestige,ready access to the US capital markets, which are

still the largest and most liquid in the world, and anenhanced ability to attract and retain key employees byoffering them a share in the company’s growth and successthrough equity-based compensation structures. Foreignprivate issuers contemplating accessing the US marketsmust determine whether they are willing to subjectthemselves to the ongoing securities reporting anddisclosure requirements, as well as the corporategovernance requirements, which are part and parcel ofregistering securities publicly in the US. Becoming andremaining a US public company is an expensive, time-consuming project that may force foreign companies toreorganise their operations and corporate governance inways that such companies would not necessarily chooseabsent US requirements.

What is an FPI?As discussed in Chapter 1, the US federal securities lawsdefine a foreign issuer as any issuer that is a foreigngovernment, a foreign national of any foreign country, ora corporation or other organisation incorporated ororganised under the laws of any foreign country.1 A foreignprivate issuer (FPI) is any issuer (other than a foreigngovernment) incorporated or organised under the laws ofa jurisdiction outside of the US, unless more than 50% ofthe issuer’s outstanding voting securities are held directlyor indirectly by residents of the US, and any of thefollowing applies: (1) the majority of the issuer’s executiveoffices or directors are US citizens or residents; (2) themajority of the issuer’s assets are located in the UnitedStates; or (3) the issuer’s business is principallyadministered in the US.2

Methodology for calculating voting securities held byUS residentsSecurities held of record by a broker, dealer, bank, ornominee for the accounts of customers residing in the USare counted as held in the US by the number of separate

accounts for which the securities are held. In addition, aforeign issuer also must treat as owned of record by USresidents any shares reported as beneficially owned by a USresident in a filing made under section 13(d) of theExchange Act or any comparable reporting provision ofanother country. This method of calculating recordownership differs from the method a US domestic issuer ispermitted to use in its determination of the number ofrecord owners for purposes of section 12(g) of theExchange Act, which counts only record owners and notbeneficial owners holding securities in street name. Rule12g3-2(a) under the Exchange Act. A foreign issuer thatmaintains multiple voting classes may use one of twomethods to determine whether its voting stock is owned bymore than 50% of US residents by assessing: (1) whether50% of the voting power of those classes on a combinedbasis is directly or indirectly owned of record by residentsof the US; or (2) the number of voting securities. Whilethe SEC staff has not expressed a preference for eithermethodology, it has affirmed that a foreign issuer mustapply a determination methodology on a consistent basis.3

While a person who has permanent resident status (i.e. aGreen Card holder) is presumed to be a US resident, theSEC staff has explained that individuals withoutpermanent resident status may also be deemed USresidents (for purposes of Rule 405 and Rule 3b-4(c))based on the following criteria:• tax residency;• nationality;• mailing address;• physical presence; • the location of a significant portion of the person’s

financial and legal relationships; or• immigration status.

While the SEC staff has not mandated the use of anyone of these criteria, it has asserted that a foreign issuermust nevertheless decide what criteria it will use todetermine residency and apply them consistently withoutchanging them to achieve a desired result.4


CHAPTER 9

Exchange Act registration


Determining US citizenship or residency of officersand directorsFor purposes of determining whether a majority of aforeign issuer’s executive officers or directors are USresidents or citizens under Rule 405 and Rule 3b-4(c), theSEC staff has clarified that the calculation must be madeseparately for each of its directors and officers.Accordingly, a foreign issuer must make the following fourdeterminations under Rule 405 and Rule 3b-4(c): • the citizenship status of its executive officers;• the residency status of its executive officers; • the citizenship status of its directors; and • the residency status of its directors.

In the case of a foreign issuer that maintains two boardsof directors, the foreign issuer must make the majorityanalysis with respect to the board of directors thatperforms functions that closely resemble those undertakenby a US-style board of directors. If such functions areallocated to both boards, then the foreign issuer mayaggregate the members of both boards for purposes ofcalculating the majority.5

Determining the location of assets in the USTo determine whether more than 50% of a foreign issuer’sassets are located in the US, the SEC staff has clarified thata foreign issuer may either:• use the geographic segment information determined in

the preparation of its financial statements; or • apply on a consistent basis any other reasonable

methodology in assessing the location and amount of itsassets.6

Determining whether the business is administeredprincipally in the USThere is no particular factor that is determinative forevaluating whether a foreign issuer’s business isadministered principally in the US under Rule 405 andRule 3b-4(c). Instead, a foreign issuer must assess on aconsolidated basis the location from which its officers,partners or managers primarily direct, control andcoordinate its activities. For example, absent any otherfactors, an issuer that holds an annual (or special) meetingof its shareholders or occasional meetings of its board ofdirectors in the US would not be deemed to beadministering its business principally in the US.7

When is FPI status determined?An FPI is only required to determine its status on the lastbusiness day of the most recently completed second fiscalquarter, rather than on a continuous basis. An FPI thatobtains its issuer status is not immediately obligated to

comply with US reporting obligations. Reportingobligations begin the first day of the FPI’s next fiscal year,when it is required to file an annual report on Form 20-Ffor the fiscal year its issuer status was determined (withinfour months of the end of that fiscal year).8 However, aforeign company that obtains FPI status following anannual qualification test can avail itself of the benefits ofFPI status immediately. Note that if an FPI loses its statusan an FPI, it will be subject to the reporting requirementsfor a US domestic issuer, and while previous SEC filingsdo not have to be amended upon the loss of such status, allfuture filings would be required to comply with therequirements for a US domestic issuer.9

How does an FPI become subject to USreporting requirements?The term public company is most frequently used to referto a company that has completed an IPO of its equitysecurities in the US and registered those securities with theSEC under the Securities Act and the Exchange Act.However, an FPI may become subject to the periodicreporting requirement of the Exchange Act in three ways:• Foreign private issuers may voluntarily choose to list a

class of equity or debt securities on a US nationalsecurities exchange (for example, NYSE, Nasdaq and thelike), either in conjunction with a securities offering, orwithout a capital raise.10 In order to list a class ofsecurities on a US national securities exchange, the FPImust register that class of securities under section 12(b)of the Exchange Act. The FPI must also meet thespecified quantitative and qualitative standards of therelevant US national securities exchange. Each USnational securities exchange establishes minimumquantitative requirements regarding the number ofstockholders (not solely record holders), number ofshares held by non-insiders (the public float), aggregatemarket value of the company’s public float, minimumstock price and certain financial standards. The FPI alsomust satisfy certain corporate governance requirements.

• An FPI may also become subject to SEC reportingrequirements within 120 days after the last day of its firstfiscal year ended on which it has: (1) total assets greaterthan $10 million; (2) 2,000 or more holders of its equitysecurities worldwide or 500 holders of its equitysecurities worldwide who are not accredited investors;and (3) 300 or more holders of its equity securitiesresident in the US. If the FPI is subject to SEC reportingrequirements, it must register those securities with theSEC under section 12(g) of the Exchange Act, unless itqualifies for the exemption from registration availableunder Exchange Act Rule 12g3-2(b).



• An FPI also may choose to register an offering of itssecurities under the Securities Act in order to execute apublic offering of its securities. Immediately uponconsummation of the public offering, the FPI becomessubject to periodic and current reporting requirementsunder section 15(d) of the Exchange Act for at least thefiscal year in which the Securities Act registrationbecame effective, whether or not the FPIcontemporaneously lists a class of securities on anexchange.By registering securities under Section 12(b) or Section

12(g) of the Exchange Act, an FPI becomes subject to thereporting requirements of section 13(a) of the ExchangeAct. In addition, FPIs subject to section 15(d) of theExchange Act must file periodic reports and otherinformation required by section 13 of the Exchange Act asif they had registered securities under section 12.

Reporting obligations of an FPI once itbecomes publicOnce an FPI becomes a public company, it must complywith the reporting and disclosure requirements under theSEC’s rules and regulations, including an ongoingrequirement to file periodic reports with the SEC. In somecases, these rules and regulations include specialaccommodations designed to encourage foreign companiesto enter the US capital markets by reducing the reportingburden on FPIs that become public companies. The FPIsare obligated to file the following Exchange Act reportswith the SEC:

1. Annual Report on Form 20-FForm 20-F is unique to the FPI and can be used for anannual report similar to a Form 10-K, filed by USdomestic issuers. The information required to be disclosedin a Form 20-F includes, but is not limited to, thefollowing:• operating results;• liquidity and capital resources;• trend information;• off-balance sheet arrangements;• consolidated statements and other financial

information;• significant business changes;• selected financial data;• risk factors;• history and development of the registrant;• business overview; and• organisational structure.

An FPI may, pursuant to Rule 12b-23 under theExchange Act, incorporate by reference information

previously filed with the SEC into any item of its annualreport on Form 20-F, subject to certain limitations setforth under Rule 12b-23. A FPI that elects to incorporatesuch information by reference must, however, identifywith specificity the information that is being incorporatedby reference.11 An FPI’s wholly owned subsidiary may alsoomit certain information under General Instruction I(2)(to Form 10-K) from its annual report on Form 20-F, aslong as the registrant includes a prominent statement onthe Form 20-F’s cover page that it satisfies the conditionsset forth under General Instruction I(1)(a) and (b) to Form10-K and is therefore filing the Form 20-F with a reduceddisclosure format.12

Form 20-F also requires a description of the FPI’scorporate governance and a statement regarding thosecorporate governance practices that conform to its homecountry requirements and not those of the US nationalsecurities exchanges on which its securities are listed. Arecent addition to the required disclosure is informationrelating to changes in, and disagreements with, the FPI’scertifying accountant, including a letter, which must befiled as an exhibit, from the former accountant statingwhether it agrees with the statements furnished by the FPIand, if not, stating the respects in which it does not agree.An FPI may also be required to disclose specialisedinformation. For example, the FPI must provide specifiedinformation if it, or any of its subsidiaries, are engaged inoil and gas operations that are material to its businessoperations or financial position.

The FPI has four months after the end of its fiscal yearto file an annual report on Form 20-F.13 However, if theForm 20-F is incorporated by reference to an FPI’sSecurities Act registration statement, the Form 20-Fshould be filed no later than three months after the end ofthe FPI’s fiscal year.14 Form 20-F may also be used forregistration statements (similar to Form 10 for USdomestic issuers) when a FPI is not engaged in a publicoffering of its securities, but is still required to be registeredunder the Exchange Act (for example, when it has equitysecurities held by 2,000 or more holders of its equitysecurities worldwide or 500 holders of its equity securitiesworldwide who are not accredited investors, and there isno other exemption available).

2. Reports on Form 6-KIn addition to an annual report on Form 20-F, an FPI mustfurnish reports on Form 6-K to the SEC from time totime. Generally, reports on Form 6-K contain informationthat is material to an investment decision in the securitiesof an FPI, and may include press releases, security holderreports and other materials that an FPI publishes in its



home country in accordance with home-country law orcustom, as well as any other information that the FPI maywant to make publicly available.

Reports on Form 6-K generally take the place of quarterlyreports on Form 10-Q (which include financial reports) andcurrent reports on Form 8-K (which include disclosure onmaterial events) that US domestic issuers are required to file.Unlike Form 10-Q or Form 8-K, there are no specificdisclosures required by Form 6-K. Instead, an FPI mustfurnish under cover of Form 6-K information that it:• makes or is required to make public pursuant to the laws

of the jurisdiction of its domicile or the laws in thejurisdiction in which it is incorporated or organised;

• files or is required to file with a stock exchange on whichits securities are traded and which was made public bythat exchange; or

• distributes or is required to distribute to its securityholders.Reports on Form 6-K must be furnished to the SEC

promptly after the information is made public by an FPI, asrequired by the country of its domicile or under the laws ofwhich it was incorporated or organised, or by a foreignsecurities exchange with which the FPI has filed theinformation. For many of the larger FPIs, the Form 6-Ksthat are filed with the SEC generally include similar types ofinformation and are filed with the same frequency as theForm 10-Qs and 8-Ks that are filed by US domestic issuers.

Accommodations under US securities lawsAn FPI receives certain regulatory concessions comparedto those received by US domestic issuers, including:• Annual report filings: Currently, an FPI must file an

annual report on Form 20 F within four months afterthe fiscal year covered by the report. By contrast, adomestic issuer must file an annual report on Form 10-K between 60 and 90 days following the end of its fiscalyear, depending on its capitalisation and other factors.

• Quarterly financial reports: An FPI is not required underUS federal securities laws to file or make publicly availablequarterly financial information, subject to certainexceptions. An FPI with a class of securities listed on theNYSE must submit semi-annual unaudited financialinformation under cover of Form 6-K within six monthsfollowing the end of the second fiscal quarter. In contrast,US domestic issuers are required to file unaudited financialinformation on quarterly reports on Form 10-Q.

• Proxy solicitations: An FPI is not required under USfederal securities laws or the rules of the US nationalsecurities exchanges to file proxy solicitation materialson Schedule 14A or 14C in connection with annual orspecial meetings of its security holders.

• Audit committee: There are numerous accommodationswith respect to the nature and composition of an FPI’saudit committee or permitted alternative.

• Internal control reporting: Both an FPI and a USdomestic issuer must annually assess their internalcontrol over financial reporting and in most instancesprovide an independent auditor’s audit of such internalcontrol. US domestic issuers are also obligated on aquarterly basis to, among other matters, assess changesin their internal control over financial reporting.However, if an FPI qualifies as an EGC (as definedbelow) and elects to be treated as such, it would beexempt from the requirement to obtain an attestationreport on internal control over financial reporting fromits registered public accounting firm.

• Executive compensation: An FPI is exempt from thedetailed disclosure requirements regarding individualexecutive compensation and compensation plan analysisnow required by the SEC. An FPI is required to makecertain disclosures regarding executive compensation onan individual basis unless it is not required to do sounder home-country laws and the information is nototherwise publicly disclosed by the FPI. In addition, anFPI must zfile as exhibits to its public filings individualmanagement contracts and compensatory plans ifrequired by its home-country regulations or if itpreviously disclosed such documents.

• Directors/officers’ equity holdings: Directors and officers ofan FPI do not have to report their equity holdings andtransactions under section 16 of the Exchange Act,subject to certain exceptions. However, shareholders,including directors and officers, may have filingobligations under section 13(d) of the Exchange Act.

• IFRS-No US GAAP reconciliation: An FPI may prepareits financial statements in accordance with IFRS asissued by the International Accounting Standards Board(IASB) without reconciliation to US GAAP. Non-USfilers reporting under US GAAP are required to includein their Form 20-F their financial statements in aninteractive data format based on eXtensible BusinessReporting Language (XBRL). In March 2017, the SECmade available an XBRL taxonomy for IFRS financialstatements. As a result of the availability of thetaxonomy, FPIs that prepare their financial statementsunder IFRS as issued by the IASB must file theirfinancial statements in XBRL for fiscal years ending onor after December 15 2017.

• Confidential submissions: Under SEC guidance issued inDecember 2011 and amended in May 2012 (the 2012Guidance), an FPI that is registering for the first timewith the SEC may submit its registration statement on a



confidential basis to the SEC staff (if the FPI is listed oris concurrently listing its securities on a non-USexchange, is being privatised by a foreign government,can demonstrate that the public filing of an initialregistration statement would conflict with its home-country law or is a foreign government registering debtsecurities), until the FPI begins to market the offeringusing the prospectus in the registration statement. Priorto July 10 2017, US domestic issuers were required tofile all registration statements publicly on the electronicdata gathering and retrieval system (EDGAR). If an FPIdoes not meet the requirements of the 2012 Guidance,it may still qualify as an emerging growth company(EGC) under Title I of the JOBS Act, in which case itcould still submit registration statements confidentially,provided that the FPI elects to be treated as an EGC andthe initial confidential submissions and all amendmentsare filed with the SEC no later than 15 days prior to theFPI’s commencement of the road show.15 In June 2017,the SEC staff announced a new policy to make theconfidential submission process for registrationstatements more broadly available. Since July 10 2017,all companies, including FPIs and Canadian issuers thatrely on the Multijurisdictional Disclosure System, maysubmit draft IPO registration statements for confidentialreview.16 Therefore, FPIs may elect to benefit from thisnew guidance, the procedures available to EGCs (if theyso qualify) or the 2012 Guidance.

• Exemption from Exchange Act reporting: An FPI may beautomatically exempt from Exchange Act reportingobligations if the FPI satisfies certain conditions.

• Easy termination of registration/de-registration: An FPI,regardless of the number of its US security holders, mayterminate its registration of equity securities under theExchange Act and cease filing reports with the SEC,subject to certain conditions. This rule allows a US-listed FPI to exit the US capital markets with relativeease and terminate its reporting duties under section15(d) of the Exchange Act.

Financial disclosureAn FPI is required to make significant disclosuresregarding its financial condition under items 8 and 18 ofits annual reports on Form 20-F. Item 8 of Form 20-F setsforth the financial information that must be included, aswell as the periods covered (generally, three years ofaudited financial statements) and the age of the financialstatements.17 In addition, Item 8 obligates a FPI to discloseany legal or arbitration proceedings involving a third partythat may have, or have recently had, a significant impacton the FPI’s financial position or profitability, as well as

any significant changes since the date of the annualfinancial statements (or since the date of the most recentinterim financial statements).

Item 18 of Form 20-F addresses the requirements for aFPI’s financial statements and accountants’ certificates thatmust be furnished with the Form 20-F. FPIs are notrequired to prepare their financial statements inaccordance with US GAAP. An FPI may prepare itsfinancial statements in accordance with the Englishlanguage version of IFRS as issued by IASB in their filingswith the SEC. However, in those instances where thefinancial statements are prepared using a basis ofaccounting other than IFRS as issued by the IASB, the FPImust provide all other information required by US GAAPand Regulation S-X, unless such requirements specificallydo not apply to the registrant as a FPI18.

Item 18(b) of Form 20-F grants a limited exemption tothe aforementioned requirement for: (1) any period inwhich net income has not been presented on a basis asreconciled to US GAAP; (2) the financial statementsprovided pursuant to Rule 3-05 of Regulation S-X inconnection with a business acquired or to be acquired; or(3) the financial statements of a less-than-majority ownedinvestee.

US GAAP reconciliations may not be necessary wherethe financial statement information is for either a businessa FPI has acquired or plans to acquire, a less-than-majority-owned investee, or a joint venture. If the target’sor less-than-majority-owned investee’s financialinformation is not prepared in accordance with US GAAP,then such target or investee must account for less than30% of a FPI’s assets or income in order to avoid USGAAP reconciliation. If, however, the target’s or less-than-majority-owned investee’s financial information isprepared in accordance with IFRS as issued by IASB (evenif the FPI’s financial statements are not prepared inaccordance with US GAAP or IFRS as issued by IASB),the FPI is not obligated to reconcile such financialstatements with US GAAP, regardless of the significance ofthe entity to the FPI’s operations.

In the case of a joint venture, if an FPI prepares financialstatements on a basis of accounting, other than US GAAP,that allows proportionate consolidation for investments injoint ventures that would be accounted for under theequity method pursuant to US GAAP, it may omitdifferences in classification or display that result fromusing proportionate consolidation in the reconciliation toUS GAAP. In order to avail itself of such omissions, thejoint venture must be an operating entity, the significantfinancial operating policies of which are, by contractualarrangement, jointly controlled by all parties having an



equity interest in the entity. Financial statements that arepresented using proportionate consolidation must providesummarised balance sheet and income statementinformation and summarised cash flow informationresulting from operating, financing and investing activitiesrelating to its pro rata interest in the joint venture.

Notwithstanding the above, compliance with Item 17 ofForm 20-F is permitted for non-issuer financial statementssuch as those pursuant to Rules 3-05, 3-09, 3-10(i) and 3-14 of Regulation S-X, as well as non-issuer target companyfinancial statements included in Forms F-4 and proxystatements. Item 17 compliance also is permitted for proforma information pursuant to article 11 of Regulation S-X. This is significant because Item 17 requires an FPI tofurnish the financial statements and accountant’scertificates that are customarily furnished by US domesticissuers and requires more onerous US GAAPreconciliation.

Where an FPI guarantees securities of its non-FPIsubsidiary, the parent FPI (as guarantor) and non-FPIsubsidiary (as issuer) may use an F-Series registrationstatement to register the offering of the securities under theSecurities Act and use Form 20-F with respect to anyreporting obligations, as long as certain requirements aresatisfied.

Where the parent-guarantor and subsidiary-issuer areeligible to present condensed consolidated financialinformation in the parent-guarantor’s filings, and theparent qualifies as an FPI, the parent-guarantor and itssubsidiaries may use:• an F-Series registration statement to register an offering

of guarantees and guaranteed securities that are issued bya subsidiary (either domestic or foreign) that does notitself qualify as an FPI; and

• a Form 20-F with respect to any reporting obligationsassociated with the F-Series registration statement.The subsidiary-issuer would not be required to submit

separate financial statements if any of Rules 3-10(b)through 3-10(d) under Regulation S-X apply and all otherapplicable conditions of the rule(s) are satisfied by theparent FPI’s filings (as guarantor). The SEC staff hasfurther explained that the same would apply in the case ofa parent-guarantor and subsidiary-issuer that were eligibleto present narrative disclosures (as opposed to condensedconsolidating financial information) under Rule 3-10under Regulation S-X.19

Where a parent FPI issues securities that are guaranteed(or co-issued) by one or more of its non-FPI subsidiaries,the parent FPI and subsidiary guarantor(s) (or co-issuers)may still use an F-Series registration statement to registerthe offering under the Securities Act and use Form 20-F

with respect to reporting obligations. Separate financialstatements will not be required to be filed for the parent’ssubsidiaries if: • Rule 3-10(e) or 3-10(f ) under Regulation S-X applies;

and • all applicable conditions of Rule 3-10 under Regulation

S-X relied upon are satisfied in the parent’s filings.20

Rule 12g3-2(b) exemptionRule 12g3-2(b) under the Exchange Act exempts certainFPIs that have sold securities in the US from the reportingobligations of the Exchange Act even if the FPI’s equitysecurities are traded on a limited basis in the over-the-counter market in the United States. An FPI can claim anexemption under Rule 12g3-2(b) if:• it is not required to file or furnish reports under sections

13(a) or 15(d) of the Exchange Act, which means thatthe FPI has neither registered securities under section12(b) (for exchange-listed securities) or section 12(g)(for other trading systems) of the Exchange Act orcompleted a registered public offering in the US in theprior 12 months;

• it currently maintains a listing of the relevant securitieson at least one non-US securities exchange that, on itsown or combined with the trading of the same securitiesin another foreign jurisdiction, constitutes the primarytrading market for those securities, as defined in the rule;and

• it has published specified non-US disclosure documentsin English on its website or through an electronicinformation delivery system generally available to thepublic in its primary trading market, since the first dayof its most recently completed fiscal year.An FPI that satisfies the Rule 12g3-2(b) exemption will

also be permitted to have established an unlisted,sponsored, or unsponsored depositary facility for its ADRs(which we discuss in greater detail below).

Officer certificationThe principal executive officer(s) and the principalfinancial officer(s) (or persons performing similarfunctions) of an FPI are obligated to make certaincertifications in a company’s periodic reports. Thesecertifications must be included in a FPI’s Form 20-F.Other reports filed or furnished by an FPI, such as Reportson Form 6-K, are not subject to the certificationrequirements because they are not considered periodic(unlike, for example a Form 10-Q), and not made inconnection with any securities offerings. Form 20-Frequires the following certifications (although certain ofthe certifications with respect to internal control over



financial reporting are not made until the FPI has been areporting company for at least a year):• the signing officer has reviewed the report of the FPI.• based on the officer’s knowledge, the report does not

contain any untrue statement of a material fact or omitto state a material fact necessary to make the statementsmade, in light of the circumstances under which suchstatements were made, not misleading with respect tothe period covered by the report;

• based on the officer’s knowledge, the financialstatements, and other financial information included inthe report, fairly present in all material respects thefinancial condition, results of operations and cash flowsof the FPI as of, and for, the periods presented in thereport.

• the FPI’s other certifying officer(s) and the signingofficer are responsible for establishing and maintainingdisclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) andinternal control over financial reporting (as defined inExchange Act Rules 13a-15(f ) and 15d-15(f )) for theFPI, and have:

• designed such disclosure controls and procedures, orcaused such disclosure controls and procedures to bedesigned under their supervision, to ensure that materialinformation relating to the FPI, including itsconsolidated subsidiaries, is made known to such officersby others within those entities, particularly during theperiod in which the report is being prepared;

• designed such internal control over financial reporting,or caused such internal control over financial reportingto be designed under their supervision, to providereasonable assurance regarding the reliability of financialreporting and the preparation of financial statements forexternal purposes in accordance with generally acceptedaccounting principles;

• evaluated the effectiveness of the FPI’s disclosurecontrols and procedures and presented in the reporttheir conclusions about the effectiveness of thedisclosure controls and procedures, as of the end of theperiod covered by the report based on such evaluation;and

• disclosed in the report any change in the FPI’s internalcontrol over financial reporting that occurred during theFPI’s most recent fiscal quarter (the FPI’s fourth fiscalquarter in the case of an annual report) that hasmaterially affected, or is reasonably likely to materiallyaffect, the FPI’s internal control over financial reporting.

• The FPI’s certifying officer(s) and the signing officerhave disclosed, based on their most recent evaluation ofinternal control over financial reporting, to the FPI’s

auditors and the audit committee of the FPI’s board ofdirectors (or persons performing the equivalentfunctions):

• all significant deficiencies and material weaknesses in thedesign or operation of internal control over financialreporting that are reasonably likely to adversely affect theFPI’s ability to record, process, summarise and reportfinancial information; and

• any fraud, whether or not material, that involvesmanagement or other employees who have a significantrole in the FPI’s internal control over financial reporting.Internal control certificationAn FPI’s obligation to comply with the internal control

certification requirements does not begin until it is eitherrequired to file an annual report pursuant to section 13(a)or 15(d) of the Exchange Act for the prior fiscal year or hadfiled an annual report with the SEC for the prior fiscalyear. An FPI that is not required to comply with Items15(b) and (c) of Form 20-F must include a statement inthe first annual report that it files in substantially thefollowing form:

‘This annual report does not include a report ofmanagement’s assessment regarding internal control overfinancial reporting or an attestation report of thecompany’s registered public accounting firm due to atransition period established by rules of the Securities andExchange Commission for newly public companies.’The Exchange Act requires that each periodic report

filed under the Exchange Act, including Form 20-F, mustinclude the internal control certifications and must besigned by the registrant’s chief executive officer and chieffinancial officer. Item 15 of Form 20-F contains theinternal control certification requirements applicable to anFPI. Under Item 15(b), an FPI must disclose:• a statement of management’s responsibility for

establishing and maintaining adequate internal controlover financial reporting for the FPI;

• a statement identifying the framework used bymanagement to evaluate the effectiveness of the FPI’sinternal control over financial reporting;

• management’s assessment of the effectiveness of the FPI’sinternal control over financial reporting as of the end ofits most recent fiscal year, including a statement as towhether or not internal control over financial reportingis effective; and

• a statement that the registered public accounting firmthat audited the financial statements included in theannual report has issued an attestation report onmanagement’s assessment of the FPI’s internal controlover financial reporting.



Further, under Item 15(c), every registered publicaccounting firm that prepares or issues an audit report onan FPI’s annual financial statements must attest to, andreport on, the assessment made by management. Suchattestation must be made in accordance with standards forattestation engagements issued or adopted by the PublicCompany Accounting Oversight Board, and cannot be thesubject of a separate engagement of the registered publicaccounting firm. However, the universal practice is for theauditors to audit management’s internal controls overfinancial reporting, and not actually attest tomanagement’s assessment. Furthermore, if an FPI qualifiesas an EGC and elects to be treated as such, it would beexempt from the requirement to obtain an attestationreport on internal control over financial reporting from itsregistered public accounting firm.

Corporate governance practicesThe SEC and the US national securities exchanges,separately, through statutes, rules and regulations, governcorporate governance practices in the US. However, an FPIregistered in the US may continue to follow certaincorporate governance practices in accordance with itshome-country rules and regulations. The SEC and the USnational securities exchanges acknowledge the disparitiesbetween domestic and foreign governance practices andthe potential cost of conforming to US standards.Accordingly, an FPI is granted exemptions from certaincorporate governance requirements in the event that itchooses to follow its home country corporate governancepractices (particularly with regard to audit committee andcompensation committee requirements).

Audit committeesThe SEC provides exemptions to its independencerequirement for audit committee members in order toaccommodate the following global practices:• Employee representation: If a non-management employee

is elected or named to the board of directors or auditcommittee of an FPI pursuant to the FPI’s governing lawor documents, an employee collective bargaining orsimilar agreement, or other home-country legal or listingrequirement, he or she may serve as a committeemember.

• Two-tiered board systems: A two-tiered system consists ofa management board and a supervisory/non-management board. The SEC treats thesupervisory/non-management board as a board ofdirectors for purposes of Rule 10A-3(b)(1) of theExchange Act. As a result, an FPI’s supervisory/non-management board can either form a separate audit

committee or, if the supervisory/non-managementboard is independent, the entire supervisory/non-management board can be designated as the auditcommittee.

• Controlling security holder representation: The SECpermits one member of an FPI’s audit committee to bea shareholder, or representative of a shareholder orshareholder group owning more than 50% of the FPI’svoting securities, subject to certain conditions.

• Foreign government representation: In some instances, aforeign government may be a significant security holderor own special shares that entitle the government toexercise certain rights related to an FPI. The SECpermits a representative of a foreign government orforeign governmental entity to be an audit committeemember, subject to certain conditions.

• Listed issuers that are foreign governments: The SEC grantsan exemption to the audit committee independencerequirements to listed issuers that are foreigngovernments.

• Board of auditors: The SEC permits auditor oversightthrough a board of auditors, subject to certainconditions.The US national securities exchanges, including the

NYSE and Nasdaq, also impose rules and regulationsgoverning audit committee composition and disclosuresfor companies that list on their exchanges. Like the SEC,each US national securities exchange provides exemptionsfor an FPI that prefers following its home countrypractices in lieu of the exchange’s rules. For example, underNasdaq rules, an FPI opting to follow its home countryaudit committee practices is required to submit a letterfrom home country counsel certifying its practice is notprohibited by home country law. An FPI is required tosubmit such a letter only once, either at the time of initiallisting or prior to the time the FPI initiates a non-conforming audit committee practice. Similarly, under theNYSE listed companies manual, an FPI may follow itshome-country audit committee practice, provided it:• discloses how its corporate governance practices differ

from those of domestically listed companies;• satisfies the independence requirements imposed by

section 10A-3 of the Exchange Act;• certifies to the NYSE that the FPI is not aware of any

violation of the NYSE corporate governance listingstandards; and

• submits an executed written affirmation annually or aninterim written affirmation each time a change occurs tothe FPI’s board or any of the committees of the board,and includes information, if applicable, indicating that apreviously independent audit committee member is no



longer independent, that a member has been added tothe audit committee, or the FPI is no longer eligible torely on, or has chosen not to continue to rely on, apreviously applicable exemption to the audit committeeindependence rules.The SEC, the NYSE and Nasdaq each require that an

FPI disclose in its annual report on Form 20-F each USnational securities exchange requirement that it does notfollow and describe its alternative home-country practice.

Compensation committeesForm 20-F requires an FPI to disclose informationregarding its compensation committee, including thenames of the committee members and a summary of theterms under which the committee operates. Similar to theaudit committee requirements, both the NYSE andNasdaq permit an FPI to follow home-country practiceswith regard to its compensation committee.

Beneficial ownership reporting obligationsOnce a company becomes a public company under section12 of the Exchange Act, its shareholders become subject tothe reporting obligations under section 13(d) and 13(g) ofthe Exchange Act, relating to their ownership of thecompany’s shares. These requirements apply toshareholders of all public companies with securitiesregistered under section 12, including US and non-USshareholders of FPIs. The underlying premise of thereporting requirements is to give other shareholders andthe securities markets notice of significant acquisitions orpotential changes in control of public companies.

Sections 13(d) and 13(g) of the Exchange Act requirethe reporting of beneficial ownership of a publiccompany’s equity securities by any shareholder (or groupof shareholders acting together) owning more than fivepercent of the FPI’s equity securities (whether held directlyor indirectly). Each five percent or more shareholder (orgroup) must report its ownership, and any changes in itsownership, of the FPI’s equity securities. This informationis reported on either Schedule 13D or Schedule 13G, asapplicable. These filings are the responsibility of eachshareholder and are generally prepared and filed by theshareholder’s counsel (or with the FPI’s counsel’sassistance). These reports must be filed with the SECthrough Edgar.

Initial reporting on Schedule 13G by exemptshareholdersEach shareholder (including any director or officer) thatbeneficially owned five percent or more of a public FPI’sequity securities before such securities were registered

under the Exchange Act must file a Schedule 13G after theend of the calendar year in which the equity securities werefirst registered. These shareholders are called exemptshareholders because they were five percent shareholdersbefore the equity securities were registered.

Reporting on Schedule 13DOnce an FPI becomes public in the US, any person thatacquires five percent or more of its equity securities or anyexempt shareholder that acquires more than two percent ofits equity securities within a 12-month period is requiredto file a Schedule 13D if he or she is not a passive investor.Schedule 13Ds are filed by those investors whose purposeis not passive, but rather are interested in influencing, oreven changing, how the FPI is run. Directors and officerswho are five percent shareholders cannot be consideredpassive investors because of their influence over the FPI, sothey must file a Schedule 13D.

Schedule 13D is a longer, more extensive form thanSchedule 13G. It requires the shareholder to discloseinformation including:• the identity of the shareholder;• how many shares of the company the shareholder owns

and how the shares are owned;• the source of the funds used to buy the shares; and• the shareholder’s purpose for owning the shares.A shareholder must amend its Schedule 13D promptly to

report any material change to the information in theschedule and any increase or decrease of one percent ormore in its beneficial ownership of the FPI’s shares.

Reporting on Schedule 13GA Schedule 13G must be filed by a passive investor thatowns less than 20% of the equity securities of an FPI (butmore than five percent) and who did not acquire its sharesfor the purpose, or with the effect, of changing orinfluencing control of the FPI. Schedule 13G requires lessdisclosure about the shareholder than Schedule 13D. Theprimary information disclosed in a Schedule 13G consistsof:• the identity of the shareholder;• how many shares of the FPI the shareholder owns and

how the shares are owned; and• a certification that the shareholder is a passive investor.

Generally a shareholder must amend its Schedule 13Gannually, after the end of each calendar year, to report anychanges in its beneficial ownership of the FPI’s equitysecurities. However, if a shareholder’s ownership exceeds10%, it must amend its Schedule 13G promptly after thedate it exceeds 10% ownership. After exceeding 10%ownership, a shareholder must also promptly amend its



Schedule 13G to report any increase or decrease of morethan five percent in its beneficial ownership of the FPI’sequity securities.

American Depositary ReceiptsAn ADR is a negotiable instrument issued by a USdepository bank that represents an ownership interest in aspecified number of securities that have been depositedwith a custodian, typically in the FPI’s country of origin. Itcan represent one or more shares, or a fraction of a share,of an FPI, and is offered as either unsponsored orsponsored programmes. Unsponsored ADR programmesare issued by a depository bank without a formalagreement with the FPI whose shares underlie the ADR.Consequently, an unsponsored ADR programme affordsthe FPI little to no control over the marketing or otherterms of the offering. Unsponsored ADRs are onlypermitted to trade in over-the-counter markets.

In contrast, sponsored ADRs are depositary receipts thatare issued pursuant to a formal agreement, known as adepository agreement, between the depository bank and anFPI. The depository agreement between the FPI and thedepository bank will, among other matters, cover fees(including fees paid by investors), communications withinvestors and monitoring the

The level of US trading activity will determine whetherUS registration will be required. There are three levels ofsponsored ADR programmes:• Level I ADRs: A sponsored Level I ADR programme is

the simplest method for FPIs to access the US capitalmarkets, and is similar to an unsponsored ADRprogramme. Unlike the other two levels of ADRs, theseare traded in the US over-the-counter market with pricespublished in the OTC Pink (formerly the Pink Sheets).21

In order to establish a Level I ADR, a FPI must: (1)qualify for an exemption under Rule 12g3-2(b) of theExchange Act; (2) execute a deposit agreement with thedepository bank and the ADR holders, which details therights and responsibilities of each party; and (3) furnisha Form F-6 with the SEC to register the ADRs under theSecurities Act. Note that financial statements and adescription of the FPI’s business are not required to beincluded in a Form F-6 registration statement.

• Level II ADRs: Level II ADR programmes enable an FPIto list its depositary receipts on a US national securitiesexchange, such as the NYSE or Nasdaq, but do notinvolve raising new capital. The requirements of a LevelII ADR programme are significantly more burdensomethan a Level I ADR. Under a Level II ADR, an FPI isobligated to file a registration statement on Form 20-Fand comply with ongoing SEC reporting requirements,

including filing annual reports on Form 20-F andreports on Form 6-K, as needed. In addition, an FPImust also satisfy any listing requirements of the relevantUS national securities exchange.

• Level III ADRs: A Level III ADR programme is used forcapital raising by an FPI. Under a Level III ADRprogramme, the depository bank and the FPI must meetall of the Level II ADR programme requirements. Inaddition, the FPI must file a registration statement onForm F-1 under the Securities Act in order to registerthe securities underlying the ADRs. After the offering,the FPI will be subject to disclosure obligations undersection 15(d) of the Exchange Act and may haveadditional disclosure obligations under section 13(a) ofthe Exchange Act if the ADRs are listed on a USnational securities exchange.For each of the three types of sponsored ADR

programmes, the instructions on Form F-6 require that thedepository bank, the FPI, its principal executive officer,financial officer, controller or principal accounting officer,at least a majority of the board of directors or personsperforming similar functions and its authorisedrepresentative in the US sign the registration statement onForm F-6.




ENDNOTES1. See Rule 405 under the Securities Act and Rule 3b-

4(b) under the Exchange Act.2. See Rule 405 under the Securities Act and Rule 3b-

4(c) under the Exchange Act.3. Securities Act Rules C&DIs, Question No. 203.17;

Exchange Act Rules C&DIs, Question No. 110.02.4. Securities Act Rules C&DIs, Question No. 203.18;

Exchange Act Rules C&DIs, Question No. 110.03.5. Securities Act Rules C&DIs, Question Nos. 203.19

and 203.20; Exchange Act Rules C&DIs, QuestionNos. 110.04 and 110.05.

6. Securities Act Rules C&DIs, Question No. 203.21;Exchange Act Rules C&DIs, Question No. 110.06.

7. Securities Act Rules C&DIs, Question Nos. 203.22and 203.23; Exchange Act Rules C&DIs, QuestionNos. 110.07 and 110.08.

8. SEC Release No. 33-8959 (September 23 2008).9. Financial Reporting Manual, Division of Corporate

Finance, Topic 6120.2, available atwww.sec.gov/divisions/corpfin/cffinancialreportingmanual.shtml.

10. A listing without a capital raise is commonly referredto as a direct listing. Given the new SEC policypermitting issuers, including FPIs, to submit forconfidential review a Form 20-F, which is discussedbelow, it is now easier to undertake a direct listing.

11. Exchange Act Forms C&Ds, Question No. 110.07.12. Exchange Act Forms C&Ds, Question No. 110.06.13. In the case of a FPI whose last day of its fiscal year is

the last day of the month (e.g. February 28), theAnnual Report on Form 20-F will be due fourcomplete months after that day. Exchange Act FormsC&DIs, Question No. 110.05.

14. Item 8.A.4 of Form 20-F.15. An EGC is defined as an issuer with total gross

revenues of under $1.07 billion (adjusted from $1billion in March 2017, and subject to inflationaryadjustment by the SEC every five years) during itsmost recently completed fiscal year. A companyremains an EGC until the earlier of five years or: • the last day of the fiscal year during which the

issuer has total annual gross revenues in excess of$1.07 billion (subject to inflationary indexing);

• the last day of the issuer’s fiscal year following thefifth anniversary of the date of the first sale ofcommon equity securities of the issuer pursuantto an effective registration statement under theSecurities Act;

• the date on which such issuer has, during theprior three-year period, issued more than $1

billion in nonconvertible debt; or • the date on which the issuer is deemed a large

accelerated filer.An issuer will not be able to qualify as an EGC ifit first sold its common stock in an IPO prior toDecember 8 2011.On July 10 2013, pursuant to section 201(a) ofthe JOBS Act, the SEC issued final rules relaxingthe prohibition on general solicitation andgeneral advertising for certain private placementsunder Rule 506 under Regulation D and Rule144A offerings. For more information, seeChapter 4 (Mechanics of a section 4(a)(2)offering) and Chapter 5 (Mechanics of a Rule144A/Regulation S offering).

16. An FPI that relies on the accommodations available toEGCs or on this new policy will have to comply withthe requirement to file publicly at least 15 days priorto commencement of its roadshow, which would notapply under the 2012 Guidance. The SEC did notextend any of the other JOBS Act benefits (i.e. theability to test the waters or reduced disclosurerequirements) to non-EGC IPO issuers. However, thenew policy does permit an IPO issuer to omitfinancial information that the issuer reasonablybelieves will not be required at the time that theregistration statement is publicly filed.The SEC also extended the ability to makeconfidential submissions for EGCs and other issuersin connection with offerings undertaken within thefirst 12 months after the issuer has become an SEC-reporting company. In the case of a follow-on offeringwithin the first 12 months following the effective dateof the IPO or an Exchange Act section 12(b)registration statement, the issuer must file publicly atleast 48 hours prior to any requested effective timeand date. An issuer relying on the confidentialsubmission process for follow-on offerings cannot fileamendments on a confidential basis, it can only makethe first submission of the follow-on registrationstatement on a confidential basis. In addition, theSEC also will permit an issuer to submit forconfidential review a registration statement filed toregister a class of securities under the Exchange Act,such as a registration statement on Form 20-F for anFPI. An issuer must publicly file an Exchange Actregistration statement at least 15 days prior to seekingits effectiveness.

17. However, an FPI that qualifies as an EGC may complywith the scaled-down disclosure requirements forEGCs, which include (1) two, rather than three, years


http://www.sec.gov/divisions/corpfin/cffinancialreportingma


of audited financial statements for initial registrationstatements, (2) for subsequent registration statements(or periodic reports), financial information within theselected financial data or MD&A disclosure for onlythose periods subsequent to those presented in theinitial registration statements, and (3) the executivecompensation disclosures for smaller reportingcompanies which are less detailed than for other typesof issuers. A smaller reporting company is generallydefined for the purposes of initial testing as an issuerthat has a public float of less than $250 million(adjusted from $75 million in September 2018) or, inthe case of an issuer that has no public float (e.g. anIPO registrant) or a public float that is less than $700million, has annual revenues of less than $100 million(adjusted from $50 million in September 2018).

18. Regulation S-X sets forth the form, content of andrequirements for financial statements required to befiled as part of: (a) registration statements under theSecurities Act; (b) registration statements undersection 12 of the Exchange Act, annual or otherreports under sections 13 and 15(d) of the ExchangeAct and proxy and information statements undersection 14 of the Exchange Act; and (c) registrationstatements and shareholder reports filed under theInvestment Company Act, except as otherwisespecifically provided in the forms.

19. Securities Act Forms C&DIs, Question No. 102.03;Exchange Act Forms C&DIs, Question No. 110.03.

20. Securities Act Forms C&DIs, Question No. 102.04;Exchange Act Forms C&DIs, Question No. 110.04.

21. OTC Pink is an electronic quotation system run byOTC Markets Group with bid and ask prices of over-the-counter stocks, including the market makers whotrade them.


The Investment Company Act governs theregistration and regulation of investmentcompanies, which may be better known toforeign issuers as collective investment

vehicles.Under the US regulatory scheme, collective investment

vehicles are subject to registration and regulation pursuantto the Investment Company Act, unless they can takeadvantage of statutory or regulatory exemptions. section7(d) of the Investment Company Act generally prohibitsany foreign entity that meets the definition of investmentcompany, which may include a foreign bank, from makinga public offering of its securities in the US in the absenceof complying with the Investment Company Act.1

Section 3(a) of the Investment Company Act broadlydefines an “investment company” to include an entity thatholds itself out as being engaged primarily in “investing,reinvesting or trading in securities” or an entity engaged inthe business of “investing, reinvesting, owning, holding ortrading in securities” if investment securities2 represent40% or more of the value of its total assets. As a result,foreign issuers that are banks, insurance companies orspecialised finance companies may find that theyinadvertently fall within the definition of an investmentcompany.3 Non-bank affiliates of banks also could meetthe definition of investment companies.Notwithstanding the breadth of the definition, foreign

banks may be able to rely on an exemption from thedefinition or from the registration obligations of theInvestment Company Act. The most commonly usedexemptions are: section 3(c)(3) for certain branches offoreign banks, Rule 3a-6 for foreign banks; Rule 3a-5 forfinance subsidiaries of foreign banks; Rule 3a-1 for foreignbank holding companies; and section 3(c)(7) for a specialpurpose vehicle (SPV) sponsored by a foreign bank or itsfinance subsidiary. These potential exemptions arediscussed below.4

US branches and agencies of foreign banks Section 3(c)(3) exempts any bank from the definition ofinvestment company. Section 2(a)(5) of the InvestmentCompany Act defines a bank to include any “branch or

agency of a foreign bank” as those terms are defined insection 1(b) of the International Bank Act of 1978 (IBA).section 1(b) of the IBA defines a “branch or agency of aforeign bank” to include any office or place of business ofa foreign bank located within the US at which deposits arereceived, credit balances are maintained, checks are paid,or money is lent. Accordingly, many branches of foreignbanks can rely on the exemption from the definition ofinvestment company included in section 3(c)(3).

Rule 3a-6 exemptionRule 3a-6 provides that a foreign bank will not beconsidered an investment company for the purposes of theInvestment Company Act. Rule 3a-6(b)(1)(i) defines a “foreign bank” as a banking

institution incorporated or organised under the laws of acountry other than the US, or a political subdivision of acountry other than the United States, that is: (a) regulatedas such by that country’s or subdivision’s government orany agency thereof; (b) engaged substantially incommercial banking activity; and (c) not operated for thepurpose of evading the provisions of the InvestmentCompany Act. Rule 3a-6(b)(1)(ii) expands the definitionof a foreign bank to specifically include certain trustcompanies or loan companies organised or incorporatedunder the laws of Canada or a political subdivision thereofand building societies that are organised under the laws ofthe UK or a political subdivision thereof.5

Finally, Rule 3a-6(b)(1)(iii) states that ‘[n]othing in thissection shall be construed to include within the definitionof foreign bank a common or collective trust or otherseparate pool of assets organized in the form of a trust orotherwise in which interests are separately offered.’ Thus,an SPV (even if sponsored by a foreign bank) would haveto find another exemption from the application of theInvestment Company Act.The term engaged substantially in commercial banking

activity, as used in the definition of foreign bank, means‘engaged regularly in, and deriving a substantial portion ofits business from, extending commercial and other types ofcredit, and accepting demand and other types of deposits,that are customary for commercial banks in the country in


CHAPTER 10

Foreign banks and the InvestmentCompany Act of 1940


which the head office of the banking institution is located’.Greater certainty regarding the meaning of the term wasprovided by a no-action letter, in which the SEC staffexplained:

‘[T]he banking activities in which a foreign bankengages clearly must be more than nominal to satisfy the“substantial” standard in the rule. In addition, in orderto meet this standard, [we] generally would expect aforeign bank: (1) to be authorised to accept demand andother types of deposits and to extend commercial andother types of credit; (2) to hold itself out as engaging in,and to engage in, each of those activities on a continuousbasis, including actively soliciting depositors andborrowers; (3) to engage in both deposit taking and creditextension at a level sufficient to require separateidentification of each in publicly disseminated reportsand regulatory filings describing the bank’s activities; and(4) to engage in either deposit taking or credit extensionas one of the bank’s principal activities.’ 6

One commentator notes that Rule 3a-6 has fourprincipal effects, which are as follows:

‘First, it enables foreign banks … to sell their securitiesin the United States without falling under the definitionof an investment company, regardless of whether thosesecurities are debt securities, preferred stock, commonstock, or any other types of securities. Second, it allowsfinance subsidiaries of foreign banks … to rely upon Rule3a-5 under the [Investment Company] Act when issuingdebt securities or nonvoting preferred stock in the UnitedStates. Third, it allows holding companies of foreignbanks … to rely upon Rule 3a-1 under the [InvestmentCompany] Act. Fourth, it enables investment companiesto acquire the securities of foreign banks … withoutregard to the limitations imposed by Section 12(d)(1) ofthe 1940 Act upon an investment company’s acquisitionof securities of another investment company.’ 7

Rule 3a-5 exemptionRule 3a-5(a) provides an exemption from the investmentcompany definition to certain finance subsidiaries of USand non-US companies. In addition, the Rule providesthat securities of a finance subsidiary held by the parentcompany or a company controlled by the parent companywill not be considered investment securities under section3(a)(1)(C) of the Investment Company Act if certainconditions are met.

The definition of finance subsidiariesIn general, a finance subsidiary is a subsidiary whoseprimary purpose is to finance the business operations of itsparent company or companies controlled by its parent

company. Rule 3a-5(b)(1) defines a “finance subsidiary” as‘any corporation: (i) all of whose securities other than debtsecurities or non-voting preferred stock meeting theapplicable requirements of [the Rule] or directors’qualifying shares are owned by its parent company or acompany controlled by its parent company; and (ii) theprimary purpose of which is to finance the businessoperations of its parent company or companies controlledby its parent company’.8 For purposes of Rule 3a-5, afinance subsidiary’s “primary purpose” will be evidenced ifthe finance subsidiary devotes at least 55% of its assets tofinancing activities and derives at least 55% of its incomefrom those activities.

The definition of a parent companyRule 3a-5(b)(2) defines a “parent company” in part, as ‘anycorporation, partnership or joint venture: (i) that is notconsidered an investment company under section 3(a) [ofthe Investment Company Act] or that is excepted orexempted by order from the definition of investmentcompany by section 3(b) [of the Investment CompanyAct] or by the rules or regulations under section 3(a) [ofthe Investment Company Act]’. Importantly, under thisdefinition, entities that are exempted from the definitionof investment company under section 3(c) of theInvestment Company Act or by order of the SEC undersection 6(c) of the Investment Company Act, will not beconsidered parent companies. Accordingly, a financesubsidiary of such an entity would need to seek exemptiverelief from the provisions of the Investment Company Act.

The definition of a company controlled by the parentcompanyRule 3a-5(b)(3) defines a “company controlled by theparent company” to include ‘any corporation…more than25% of whose outstanding voting securities arebeneficially owned directly or indirectly by the parentcompany; or [any partnership or joint venture with respectto which] the parent company has the power to exercise acontrolling influence over the management or policies ofthe partnership or joint venture’. Similar to the definitionof parent company above, such an entity must either notmeet the definition of investment company or must beexempted from such definition by SEC order undersection 3(b) or by rules and regulations adopted undersection 3(a). A controlled company must be organisedunder the laws of the US or a state thereof, be an FPI, orbe a foreign bank or insurance company.

The conditions for finance subsidiaries In order to qualify under Rule 3a-5, any securities of a



finance subsidiary issued to or held by the public in the USmust be debt securities or nonvoting preferred stock.9 Anysuch debt securities must be unconditionally guaranteedby the parent company as to the payment of principal,interest and premium, if any, and any such nonvotingpreferred stock must be unconditionally guaranteed by theparent company with respect to dividends, payment of anyliquidation preference, and any payments under a sinkingfund. The parent company’s guarantee must provide thatin the event of a default by a finance subsidiary, the holdersof the securities issued by the finance subsidiary mayinstitute legal proceedings directly against the parentcompany to enforce the guarantee without first proceedingagainst the finance subsidiary. The parent companyguarantee may be subordinated in right of payment toother debt of the parent company.10

Where the parent company is a foreign bank, it may, inlieu of a guarantee, issue an irrevocable letter of credit infavour of the holders of the finance subsidiary’s debtsecurities or nonvoting preferred stock, as the case may be.This letter of credit must be in an amount sufficient tofund all of the amounts required to be guaranteed,provided that: (i) payment on such letter of credit can beconditional only upon the presentation of customarydocumentation; and (ii) the beneficiary of such letter ofcredit cannot be required by either the letter of credit orapplicable law to institute proceedings against the financesubsidiary before enforcing its remedies against the parentcompany under the letter of credit.Any convertible or exchangeable securities issued by a

finance subsidiary must be convertible or exchangeableonly for securities issued by the parent company (and, inthe case of a partnership or joint venture, for securitiesissued by the parent company or participants in the jointventure) or for debt securities or non-voting preferredstock issued by the finance subsidiary that meet therequirements of the Rule. Finally, in order to rely on Rule 3a-5, a finance

subsidiary must invest in or loan to its parent company ora company controlled by its parent company at least 85%of any cash or cash equivalents raised through an offeringof its debt securities or non-voting preferred stock, orthrough other borrowings, as soon as practicable, but in noevent later than six months after the finance subsidiary’sreceipt of such proceeds. In addition, a finance subsidiaryrelying on Rule 3a-5 may not invest in, reinvest in, own,hold or trade in securities other than governmentsecurities, securities of its parent company or a companycontrolled by its parent company (or, in the case of apartnership or joint venture, the securities of the partnersor participants in the joint venture) or debt securities

(including repurchase agreements) which are exempt fromregistration under the Securities Act pursuant to section3(a)(3).

Rule 3a-1 exemptionForeign bank holding companies may also be able to takeadvantage of Rule 3a-1, which provides an exclusion fromthe definition of investment company contained in section3(a)(1)(C). Rule 3a-1 provides that, notwithstandingsection 3(a)(1)(C), an issuer will be deemed not be aninvestment company under the Investment Company Actif:(a) No more than 45% of the value11 of such issuer’s

total assets (exclusive of government securities and cashitems) consists of, and no more than 45% of such issuer’snet income after taxes (for the last four fiscal quarterscombined) is derived from, securities other than: (i)government securities; (ii) securities issued by employees’securities companies; (iii) securities issued by the majority-owned subsidiaries of the issuer (other than subsidiariesrelying on the exclusion from the definition of investmentcompany in sections 3(b)(3) or 3(c)(1) which are notinvestment companies; and (4) securities issued bycompanies which are controlled primarily by such issuer,through which such issuer engages in a business other thanthat of investing, reinvesting, owning, holding or tradingin securities, and which are not investment companies.(b) The issuer is not an investment company as

defined in sections 3(a)(1)(A) or (B) and is not a specialsituation investment company; 12 and(c) The percentages described in paragraph (a) above

are determined on an unconsolidated basis, except that anissuer shall consolidate its financial statements with thefinancial statements of any wholly-owned subsidiaries.As discussed above, foreign banks qualifying for an

exemption under Rule 3a-6 would not be consideredinvestment companies, and, as a result, their holdingcompanies could potentially rely upon Rule 3a-1. TheSEC has stated:

‘With the adoption of Rule 3a-6, foreign banks … areno longer regarded as “investment companies” under the[Investment Company] Act. Therefore, foreign bank …holding companies qualify for the exception from thedefinition of investment company in Section [3(a)(1)(C)under the Investment Company Act] or Rule 3a-1 on thesame basis as United States banks’.13



Section 3(c)(7)A foreign bank, a finance subsidiary, or a special purposetrust or issuance vehicle sponsored by a foreign bank orfinance subsidiary also may qualify for an exemption undersection 3(c)(7). Section 3(c)(7) provides an exemption to‘[a]ny issuer, the outstanding securities of which are ownedexclusively by purchasers who, at the time of acquisition ofsuch securities, are qualified purchasers, and which is notmaking and does not at that time propose to make a publicoffering of such securities’. Thus, in order to rely on thisexemption, an entity must offer its securities in a privateplacement exempt from registration under the SecuritiesAct pursuant to section 4(a)(2) or Regulation D. The definition of qualified purchaser is set forth in

section 2(a)(51)(A) of the Securities Act, and generallyincludes a natural person (including any person who holdsa joint, community property, or other similar sharedownership interest in an issuer that is excepted undersection 3(c)(7) with that person’s qualified purchaserspouse) who owns not less than $5 million in investments,and an entity acting for its own account or the account ofother qualified purchasers, who in the aggregate owns andinvests on a discretionary basis, not less than $25 millionin investments. Generally, SPVs will rely on the section3(c)(7) exemption and structure their offerings as privateplacements of Rule 144A eligible securities with thetransfer restrictions expressly limiting transfers or resales toQIBs that are also qualified purchasers.



ENDNOTES1. Although section 7(d) explicitly prohibits only public

offerings by foreign investment companies, the SECstaff has interpreted the provision to also prohibitprivate offerings by foreign investment companiesunless such companies can comply with either section3(c)(1) or section 3(c)(7). See Touche Remnant, SECno-action letter (August 23 1984).

2. Section 3(a)(2) of the Investment Company Actdefines “investment securities” to include all securitiesexcept (A) government securities, (B) securities issuedby employees’ securities companies, and (C) securitiesissued by majority-owned subsidiaries of the ownerwhich (i) are not investment companies, and (ii) arenot relying on the exception from the definition ofinvestment company contained in either section3(c)(1) or section 3(c)(7).

3. Certain operating companies, such as those thatdevote themselves principally to research anddevelopment activities and that retain offeringproceeds in cash, cash equivalents or securities, alsoshould take care to avoid being classified as investmentcompanies within the meaning of the InvestmentCompany Act.

4. This chapter does not contain a comprehensivesummary of all of the potential exemptions fromregistration under the Investment Company Act. Inaddition, even if an issuer does not qualify for anexemption from the Investment Company Act, it mayseek an exemption from the SEC under section 6(c).

5. In each case, such an entity must be regulated by thatcountry’s or subdivision’s government or any agencythereof and cannot be operated for the purpose ofevading the provisions of the Investment CompanyAct.

6. Seward & Kissel, SEC no-action letter (October 122005).

7. Robert H. Rosenblum, Investment CompanyDetermination under the 1940 Act: Exemptions andExceptions (2003), §29.1.

8. Rule 3a-5 does not define the term corporation. TheSEC staff has, however, taken the position that, forpurposes of the Rule, the term includes not onlyentities formed as corporations, but also certainpartnerships, limited liability companies and businesstrusts.

9. A finance subsidiary may also issue debt securities andnonvoting preferred stock that is not guaranteed by itsparent company in a private placement in the USunder section 4(a)(2) or Regulation D or in a publicoffering outside the US under Regulation S. Such pri-vate securities may be resold to QIBs pursuant to Rule144A and to IAIs.

10. Under appropriate circumstances, the SEC hasgranted exemptive orders when a finance subsidiary’ssecurities were not unconditionally guaranteed by theparent company. See, eg, BellSouth Capital FundingCorp, Investment Company Act Rel. No. 16054(October 14 1987).

11. Section 2(a)(41) of the Investment Company Actdefines “value” to mean: (i) with respect to securitiesowned at the end of the last preceding fiscal quarterfor which market quotations are readily available, themarket value at the end of such quarter; (ii) withrespect to other securities and assets owned at the endof the last preceding fiscal quarter, fair value at the endof such quarter, as determined in good faith by anentity’s board of directors; and (iii) with respect tosecurities and other assets acquired after the end of thelast preceding fiscal quarter, the cost thereof.

12. “Special situation investment company” is not definedin the Investment Company Act. According to theSEC, however, ‘[s]pecial situation investment compa-nies are companies which secure control of other com-panies primarily for the purpose of making a profit inthe sale of the controlled company’s securities’. SeeRule 3a-1 Proposing Release, Investment CompanyAct Release No. 10937 (November 13 1979).

13. Rule 3a-6 Adopting Release, Investment CompanyAct Rel. No. 18381 (October 29 1991).




Every US state has its own blue sky or securities lawthat is designed to protect investors againstfraudulent sales practices and activities,independent of the US federal securities laws.

Blue sky laws may require registration of, or at least noticefilings with respect to, securities exempt from registrationunder US federal securities laws. While these laws vary fromstate to state, most state laws require issuers to register theirofferings before the issuers can sell their securities toresidents of the particular state, unless the securities offeringsare exempt from registration.1 These laws also address thelicensing of brokerage firms, and their brokers and certaininvestment advisers and their representatives.

Covered securitiesIn October 1996, Congress enacted the NationalSecurities Markets Improvement Act (NSMIA), whichpre-empted the application of blue sky laws regarding asubstantial number of securities offerings and/ortransactions, and substantially changed the scope of bluesky regulation. NSMIA amended section 18 of theSecurities Act to exempt covered securities from theregistration requirements of the blue sky laws. Any offeringdocument with respect to a covered security is similarlyexempt from state regulation if the document is preparedby or on behalf of the issuer.Covered securities include the following:• securities listed or authorised for listing on the NYSE orNasdaq, and securities of the same issuer that are equalor senior in rank to such listed securities (collectively,listed covered securities);• securities registered under the Investment CompanyAct;• securities offered under to Rule 506 under RegulationD; and• securities exempt under section 3(a) of the Securities Act(with certain exceptions).No state filings or fees may be required in offerings ofcovered securities, but states still may require certain noticefilings to be made and may charge filing fees for offeringsof other covered securities.2 NSMIA also permits states tocontinue to enforce their own antifraud laws.3

NSMIA does not pre-empt secondary markettransactions in securities from blue sky laws. Onlytransactions under sections 4(a)(1) or 4(a)(3) of theSecurities Act are pre-empted if the issuer is a reportingcompany. State securities statutes include different types ofnon-issuer exemptions that may apply to secondary markettransactions, including exemptions for isolatedtransactions, the manual exemption (where the issuer ofthe securities publishes certain continuous disclosureinformation on an ongoing basis in a recognised manual)and unsolicited transactions conducted through aregistered broker-dealer. These exemptions, however, mayvary significantly from state to state.

Bank notesAs we have discussed, section 3(a)(2) of the Securities Actexempts from registration under the Securities Act anysecurity issued or guaranteed by a bank. This exemption ispremised on the notion that, whether state or federal,banks are highly and relatively uniformly regulated, and asa result will provide adequate disclosure to investors abouttheir finances in the absence of federal securitiesregistration requirements. In addition, banks are alsosubject to various capital requirements that may increasethe likelihood that holders of their debt securities willreceive timely payments of principal and interest. Banknotes qualify as covered securities because they are exemptfrom registration under the Securities Act under to section3(a)(2). However, bank notes typically are not listed orauthorised for listing on the NYSE or Nasdaq, whichmeans that states may still require certain notice filings andcharge filing fees for bank note offerings.Most states provide exemptions from registration forbank notes. For example, the state of Texas provides anexemption from registration for securities issued bydomestic banks and certain thrifts:‘The sale by the issuer itself, or by a registered dealer, of

any security issued or guaranteed by any bank organisedand subject to regulation under the laws of the UnitedStates or under the laws of any State or territory of theUnited States, or any insular possession thereof, or by anysavings and loan association organised and subject to

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Chapter11_4.qxp_Layout 1 4/2/19 11:59 AM Page 84

regulation under the laws of this State, or the sale by theissuer itself of any security issued by any federal savingsand loan association.’4

In addition, most states do not require registration forbank notes offered by a foreign bank through its USbranch or agency under the principles of comity, on thetheory that the domestic branch or agency is subject tooversight and regulation by US banking authorities.However, it is understood that there are a few states,including Texas, that do not extend the exemption to USbranches or agencies.Nevertheless, in 1998 the Texas State Securities Board(TSSB) issued no-action letter relief and did not requireregistration for bonds issued by the State Bank of India inminimum denominations of $1,000 and marketed to USresidents of Indian origin (NRIs) through US branches.5

The TSSB emphasised that the bonds would be treated asbank deposits subject to the banking regulationsadministered by the Reserve Bank of India and the Indiangovernment, that reserve requirements had been extendedto NRI deposits, and that the bonds were subject to thesame reserve requirements applicable to similar deposits.The TSSB also pointed out that the bonds would bemarketed in the US through the issuer’s New York andChicago branches, which were regulated by New York andIllinois, respectively, and by the FDIC, and that the issuerrepresented that the nature and extent of state and federalregulation of the branches was substantially equivalent tothat applicable to Texas state-chartered banks. This wouldsuggest that bank notes offered by US branches or agenciesof foreign banks should also be accorded similar relief inTexas, as such branches or agencies would be subject to thesame regulation and oversight as US banks.6

As a reminder, where certain covered securities,including bank notes, are offered, a state may still reservethe right to require a notice filing and the payment of afiling fee if the security is not otherwise exempt fromregistration under that state’s laws.7 In addition, somestates may require filing fees for each series of bank notesoffered (rather than a single one-time fee) and may notplace a cap on aggregate fees paid.

Section 3(a)(3) securitiesShort-term securities issued pursuant to section 3(a)(3) ofthe Securities Act (such as commercial paper) are coveredsecurities under NSMIA, and therefore exempt fromregistration under state blue sky laws.

Rule 144A securitiesRule 144A is a safe harbour exemption from theregistration requirements of the Securities Act for certain

resales of qualifying securities by certain persons other thanthe issuer of the securities. The exemption applies to resalesof securities to QIBs (or purchasers that the sellers and anypersons acting on the sellers’ behalf reasonably believe tobe QIBs). The securities eligible for resale under Rule144A are securities of US and foreign issuers that are notlisted on a US securities exchange or quoted on a USautomated inter-dealer quotation system.The securities laws of each state provide for anexemption from state securities registration for both salesand resales of securities to specified types of institutionalinvestors. The institutional investor exemption in moststates is self-executing, which means that no compliancemeasures, such as filings or fee payments, are needed toqualify for the exemption. Thus, if the investor to whichthe foreign issuer is making an offer or sale qualifies as aninstitutional investor, as defined in that state’s blue skystatute, the foreign issuer is not required to pay any fees to,nor make filings with, the state securities regulators exceptfor (where required) the filing of a Form U-2 (the uniformconsent to service of process designating a state’s secretaryof state or securities commissioner as the issuer’s agent forservice of process in that state).The breadth of the institutional investor exemption,however, varies from state to state. Most states haveadopted provisions similar to those in the UniformSecurities Act, which exempts offers and sales to specifiedtypes of institutional investors, such as banks, savingsinstitutions, trust companies, insurance companies,registered investment companies or to a broker-dealer,whether the purchaser is acting for itself or in somefiduciary capacity. Despite certain similarities betweenthese institutions and accredited investors as defined inRegulation D, it should be noted that individuals,regardless of financial sophistication or assets held, are notcovered by the exemption.

Regulation DRegulation D provides a limited safe harbour fromregistration for offers and sales by issuers. The safe harbourcan be utilised under the provisions of Rules 504 or 506under Regulation D. The first, Rule 504, provides anexemption pursuant to section 3(b) of the Securities Actfor offerings of up to $5 million.8 The second, Rule 506,which is the most popular, provides an exemptionpursuant to section 4(a)(2) of the Securities Act for limitedofferings and sales without regard to dollar amount, butonly to 35 purchasers and an unlimited number of AIs,who are typically institutional investors or high net-worthindividuals. Under Rule 506, NIAs must also havesufficient knowledge and experience in financial and



business matters to be capable of evaluating the merits andrisks of the proposed investment; and this sophisticationrequirement is the distinguishing feature of Rule 506. Inorder to avail itself of any of the safe harbours, the issuermust also take reasonable care to ensure that the purchasersof the securities are not underwriters and must file a FormD, including a sales report, with the SEC no later than 15days after the first sale of securities under the offering.Until September 2013, general solicitation was notpermitted in private placements in accordance with Rule506(b). However, in July 2013, pursuant to section 201 ofthe JOBS Act, the SEC revised Rule 506 by adding a newexemption, Rule 506(c), which permits general solicitationif the issuer takes reasonable steps to verify that purchasersare AIs, all purchasers are AIs, or the issuer reasonablybelieves that they are, immediately prior to the sale, andcertain other requirements are met. The SEC also revisedRule 506 to disqualify certain bad actors fromparticipating in such offerings.Securities offered pursuant to the Rule 506 safe harbourfall under NSMIA’s definition of covered securities, andare therefore exempt from blue sky filings as describedabove; however, securities issued in reliance on Rule 504are not covered securities.



ENDNOTES1. Most states have an exemption from securitiesregistration requirements for securities issued by aforeign government. Generally, the language of theexemption tracks section 201(2) of the UniformSecurities Act (2002), which provides that an exemptsecurity is ‘a security issued, insured or guaranteed bya foreign government with which the United Statesmaintains diplomatic relations, or any of its politicalsubdivisions, if the security is recognized as a validobligation by the issuer, insurer or guarantor’.

2. Sections 18(c)(2)(A) and (B) of the Securities Act.3. Section 18(c)(1) of the Securities Act.4. Tex. Rev. Civ. Stat. Ann. art. 581-5, § L.5. See 3A Blue Sky L. Rep. (CCH) ¶ 55,828O.6. Another helpful fact would be a minimumdenomination significantly higher than $1,000 pernote, to help insure that the offering is more of aninstitutional offering than a retail offering.

7. See, e.g. 7 Tex. Admin. Code §§ 114.1-.4, 3A Blue SkyL. Rep. (CCH) ¶¶ 55,590P – 55,590S.

8. In October 2016, the SEC adopted final rules that,among other things, (1) amended Rule 504 to (a)increase the aggregate amount of securities that maybe offered and sold in any twelve-month period from$1 million to $5 million and (b) disqualify certain badactors from participating in Rule 504 offerings, and(2) repealed Rule 505 of Regulation D, which hadprovided a safe harbour from registration for securitiesoffered and sold in any 12-month period from $1million to $5 million. The repeal of Rule 505 tookeffect on May 20 2017.




The SEC has delegated part of the responsibilityfor administering securities laws to various self-regulatory organisations (SROs), as definedunder the Exchange Act, including the various

stock exchanges and the Financial Industry RegulatoryAuthority (Finra). Finra is the principal SRO for broker-dealers doing business in the US. Virtually all registeredbroker-dealers in the US are required to be members ofFinra, which was created in July 2007 through theconsolidation of the National Association of SecuritiesDealers (NASD) and the member regulation, enforcementand arbitration functions of the NYSE. Over the pastdecade, Finra has been adopting a set of Finra rules, manyof which are based upon and supersede prior NASD andNYSE rules. However, as of January 1 2019, there are anumber of pre-2007 NASD rules which continue in effectfor all broker-dealers, and NYSE rules that remain in effectfor NYSE member firms.Foreign bank issuers will be required to consider Finra

rules in various contexts. Any person in the US engaged inthe business of effecting securities transactions is requiredto register with the SEC as a broker-dealer.1 Therefore, it islikely that any financial intermediary engaged to assistwith a financing in the US will be an SEC-registeredbroker-dealer that is a member of Finra.

Basic Finra requirementsFinra rules impose a number of general requirements onmember firms, including a duty of fair dealing, a duty torecommend suitable investments, a duty to obtain bestexecution when effecting trades and a duty to charge faircommissions and mark-ups. Finra also requires memberfirms to ensure their communications with the public arefair and balanced and provide a sound basis for evaluatingthe facts about any particular security or investment strategy.Risk disclosures in offering documents (a prospectus, or anoffering circular or private placement memorandum) do notcure deficient disclosure in sales materials.Finra Rule 2111 requires that firms have a reasonable

basis for determining that a product is suitable forinvestors in general and that it is suitable for a specificcustomer prior to recommending the purchase or sale of a

security to that customer. In this regard, Finra Rule 2090requires broker-dealers to know the customer by using‘reasonable diligence, in regard to the opening of everyaccount, to know (and retain) the essential factsconcerning every customer’. Broker-dealers should makereasonable efforts to obtain information concerning: thecustomer’s financial status, tax status, investmentobjectives, time horizon, liquidity needs, risk tolerance,and any other information considered reasonable by themember or registered representative in makingrecommendations to the customer. A firm’s registeredrepresentatives must familiarise themselves with eachcustomer’s financial situation, trading experience, andability to tolerate risk.The suitability rules also include a quantitative element,

whereby the broker-dealer must determine if a specifictransaction, when viewed in the context of othertransactions for that customer, is suitable for the customer.2

The suitability requirements set forth in the Finra rulesare likely to be supplemented and/or superseded by a newbest interest standard to be adopted by the SEC. The SECintroduced this new standard in the proposed RegulationBI in April 2018. It is currently expected that RegulationBI will be finalised and adopted in the second quarter of2019. However, the significant issues and debate aboutthis rule may require more time to resolve.Although the final form of Regulation BI cannot be

determined at this time, it is expected to include thefollowing elements:• a requirement that broker-dealers act in the best interestof their retail customers and not place the broker-dealer’sinterest ahead of the customer;

• a requirement that broker-dealers implement compensa-tion practices and supervisory procedures intended toensure that their associated persons act in the best inter-est of customers;

• a requirement to identify material conflicts of interestand to eliminate or mitigate such conflicts; and

• a requirement to provide retail customers with certainbasic disclosures about the broker-dealer’s services,standard of care, fees and charges and material conflictsof interest.

CHAPTER 12

Regulation by the Financial IndustryRegulatory Authority


Finra compensation reviewFinra determines whether the terms of the underwritingcompensation and arrangements relating to publicofferings are unfair and unreasonable. Finra Rule 5110addresses commercial fairness in underwriting and otherarrangements for the distribution of securities, andprovides for review by Finra of underwriting or otherarrangements in connection with most public offerings inorder to enable Finra to assess the fairness andreasonableness of proposed underwriting compensation. Adetermination regarding the fairness or reasonableness ofcompensation will be highly fact-specific and will dependon the type of offering. An offering required to be filedwith Finra may not proceed until Finra has delivered a no-objection opinion relating to the underwritingcompensation.The Finra compensation rules generally apply only to

public offerings. Private placements are generally exemptfrom Rule 5110, as are offerings of exempted securities andmunicipal securities as defined in the Exchange Act andofferings made in connection with mergers and similarcorporate reorganisations.Finra Rule 5110(b)(1) states that ‘[n]o member or person

associated with a member shall participate in any manner inany public offering of securities subject to this Rule, [Finra]Rule 2310 or [Finra] Rule 5121 unless documents andinformation as specified herein relating to the offering havebeen filed with and reviewed by Finra’. Unless specificallyexempt, as discussed below, Finra requires that certaindocuments and agreements be filed, including:• the registration statement, offering circular or offeringmemorandum;

• any proposed underwriting agreement, agreementamong underwriters, agency agreement or similaragreement or any other document that describes theunderwriting or other arrangements in connection withthe distribution;

• each pre- and post-effective amendment to theregistration statement or other offering document;

• the final registration statement as declared effective bythe SEC, or the equivalent final offering document, anda list of all members of the underwriting syndicate, if notindicated; and

• the executed form of the final underwriting documents. In addition, the Finra filing must include the following

information:• an estimate of the maximum public offering price;• an estimate of the maximum underwriting discount orcommission;

• an estimate of the maximum reimbursement forunderwriter’s expenses and underwriter’s counsel’s fees; and

• a statement of the association or affiliation with anyFinra member of any officer or director of the issuer, anybeneficial owner of five percent or more of any class ofthe issuer’s securities, and of any beneficial owner of theissuer’s unregistered equity securities that were acquiredduring the 180-day period immediately preceding therequired filing date of the public offering.All documents are filed with Finra through its electronic

filing system for public offerings. Unless already publiclyavailable, documents or information filed with Finra willbe treated as confidential. Finra uses these documents todetermine compliance with applicable rules and for otherregulatory purposes it deems appropriate.Certain offerings, although subject to the rule’s

substantive requirements, are exempt from the filingrequirements. These include, among others:• securities offered by an issuer that has unsecured non-convertible debt with a term of at least four years, orunsecured non-convertible preferred securities, is ratedby a nationally recognised statistical rating organisation(NSRO) in one of its four highest generic ratingcategories, except that an IPO of the equity of an issueris always required to be filed;

• non-convertible debt securities and non-convertiblepreferred securities rated by an NSRO in one of its fourhighest generic rating categories; and

• offerings of securities pursuant to a shelf registrationstatement of an issuer that: (i) has been a reportingcompany for at least three years; and (ii) has an aggregatemarket value of the voting stock held by non-affiliates ofat least $150 million (or $100 million aggregate marketvalue and an annual trading volume of three millionshares).Public offerings by banks, although exempt from SEC

registration under section 3(a)(2), are subject to Finra Rule5110. The offering documents and distribution agree-ments for public securities offerings conducted by banksunder section 3(a)(2) of the Securities Act must be filedwith Finra for review, unless an exemption is available.

Offerings involving a conflict of interestFinra Rule 5121 imposes additional requirements onpublic offerings that involve certain conflicts of interest.Such conflicts include situations where a broker-dealer isoffering securities issued by itself or by an affiliate such asa related bank or bank holding company. A conflict ofinterest could also arise from the intended use of offeringproceeds to pay indebtedness due to a bank or otheraffiliate of the broker-dealer. In such situations, it isgenerally required that a qualified independentunderwriter (QIU) participate in and price the offering. In



addition, there must be adequate disclosure of the conflictof interest, as well as the role of the QIU in theunderwriting. In order for a broker-dealer to be deemed a QIU, it must

be unaffiliated with the issuer and its affiliates, and havesufficient experience in offerings of a similar nature. Thespecific requirements are set forth in Rule 5121(f )(12).Public offerings that are subject to Rule 5121 are also

subject to Rule 5110, even if the offering would otherwisehave been exempt from the requirements of Rule 5110.A QIU is not required if the securities offered are

investment grade-rated; or if they are part of the sameseries - with equal rights and obligations - as otherinvestment grade-rated securities, and other conditions aresatisfied. Offerings by foreign banks often qualify for thisexemption.

Finra communications rulesFinra has adopted a series of rules relating tocommunications with customers as set forth in Rules 2210et. seq. Rule 2210 sets forth general requirements forcommunications, while the other rules address specificcommunications related to variable annuities, investmentcompanies, bond mutual funds, investment analysis tools,securities futures, collateralised mortgage obligations(CMOs) and options.Finra Rule 2210 divides communications into three

categories: (i) institutional communications that are sentonly to institutional investors (generally, investors with atleast $50 million in assets); (ii) correspondence, whichconsists of communications sent to not more than 25 retailinvestors in any 30-day period; and (iii) retailcommunications, which includes all othercommunications.Institutional communications and correspondence must

be reviewed internally at the member firm by anappropriate supervisor. However, retail communicationsmay need to be filed with Finra and in certain cases mayrequire pre-approval by Finra. Retail communications thatmust be filed include communications relating to CMOsand ‘retail communications concerning any security that isregistered under the Securities Act and that is derived fromor based on a single security, a basket of securities, anindex, a commodity, a debt issuance or a foreign currency’.Finra Rule 2210(c)(7)(E) exempts from the filingrequirement any prospectuses, preliminary prospectuses,offering circulars and similar documents that have beenfiled with the SEC. Rule 2210 also imposes certain content standards on all

customer communications. Under Rule 2210(d), allcommunications must be fair and balanced and must

provide a sound basis for evaluating the facts in regard toany particular investment. Material omissions areproscribed, as are any false, exaggerated, unwarranted,promissory or misleading statements or claims. Thediscussion of risks and potential benefits must be balancedand the firm should not predict or project performance orimply that past performance will recur. Member firmsshould ensure that statements are clear and not misleadingwithin the context in which they are made. They shouldalso consider the nature of the audience to which thecommunication will be directed, and must provide detailsand explanations appropriate to the audience. If thecommunication includes an investment recommendation,the member firm must disclose potential conflicts, such asthe fact that it makes a market in the recommendedsecurity or that it has managed or co-managed a publicoffering for the issuer within the past 12 months.

Research reportsFinra Rules 2241 governs research reports on equitysecurities, while Finra Rule 2242 governs research reportson debt securities.3 These rules reflect a principles-basedapproach and incorporate many of the Finrainterpretations that have developed over the last decade.Finra Rule 2241 also seeks to establish a level playing fieldbetween investment banks subject to the global researchanalyst settlement and those that are not, as well as forissuers that are “emerging growth companies” (EGCs).4

Finra Rules 2241 and 2242 both require member firmsto establish, maintain and enforce written policies andprocedures reasonably designed to identify and effectivelymanage conflicts of interest related to (a) the preparation,content and distribution of research reports, (b) publicappearances by research analysts, and (c) the interactionbetween research analysts and persons outside of theresearch department, including investment banking andsales and trading personnel, the subject companies andcustomers. The rules each require that a firm’s policies andprocedures establish information barriers or otherinstitutional safeguards that ensure that the researchdepartment is insulated from the review, pressure oroversight by persons engaged in investment bankingservices, sales and trading (or, in the case of debt research,principal trading or sales and trading activities) and otherpersons who may be biased in their judgment orsupervision. Written policies must also be reasonably designed to:

• promote objective and reliable research that providesonly the truly held opinions of research personnel;5

• prevent the manipulation of research personnel (or theirresearch reports) in an attempt to favour the interests of



the firm or a current or prospective customer or class ofcustomers;

• provide for separate reporting lines for both research andinvestment banking personnel;

• provide for a dedicated legal and compliance staff for theresearch department;

• prohibit retaliation against research personnel for anunfavourable report;

• prohibit investment banking personnel, and other firmemployees engaged in investment banking servicesactivities, from directing research personnel to engage insales or marketing efforts related to any investmentbanking transactions;

• prohibit three-way meetings with research personnel,investors and investment banking personnel (with theexception of certain meetings with EGCs); and

• ensure the independent review of the researchdepartment.The head of the research department may report to or

through a person or persons to whom the head ofinvestment banking also reports, provided that suchperson(s) have no direct responsibility for investmentbanking activities or decisions. In accordance with Finra Rules 2241 and 2242, firms

must implement written policies and procedures that at aminimum prohibit investment banking personnel (or, inthe case of debt research, personnel engaged in investmentbanking services transactions, principal trading activitiesor sales and trading), from supervising or controllingresearch analysts, including exerting any influence orcontrol over research analyst compensation anddeterminations.Rules 2241 and 2242 also require the member firm to

make a variety of disclosures in the report intended toidentify potential conflicts of interest that could affect theobjectivity of the report. Such disclosures include, amongother things, past or future investment bankingengagements for the subject company, acting as a marketmaker in the subject company’s securities, ownership bythe member firm and its affiliates of an aggregate onepercent or greater interest in the subject company’s equitysecurities, and any compensation received by the memberfirm or the analyst from the subject company during thepast 12 months. Additional disclosures are mandated withrespect to any ratings system or price targets included inthe research report.There are certain restrictions on the dissemination of

research reports by broker-dealers that are acting asunderwriters for the company that is the subject of thereport. Generally, underwriters will refrain fromdisseminating research about a company that they are in

the process of preparing a registered offering on behalf of.Rule 2241 imposes a post-offering quiet period of aminimum of ten days in the case of an IPO and aminimum of three days in the case of a secondary offering.Finra interprets the date of the offering to be the later ofthe effective date of the registration statement or the firstdate on which the securities were bona fide offered to thepublic. Notwithstanding the limitations of Rule 2241,many broker-dealers voluntarily elect not to disseminateresearch reports about a company for whom theyunderwrote an IPO until 25 days after the offering.The quiet period restrictions generally do not apply to

EGCs.6

Exempt offeringsFinra member firms acting as placement agents in privateplacements under Regulation D or in other exemptofferings are obligated to conduct a reasonableinvestigation of the issuer and the securities that are beingoffered for sale. The analysis should include, at aminimum, a reasonable investigation concerning theissuer, its management, its business prospects, and theintended use of proceeds of the offering.Pursuant to Finra Rule 5123, a member firm

participating in a non-public offering must submit toFinra, or have submitted on its behalf by a designatedmember, a copy of any private placement memorandum,term sheet or other offering document, including anymaterially amended versions of those documents, used inconnection with the offering within 15 calendar days ofthe date of first sale, or indicate to Finra that no suchdocuments were used. There is no requirement that Finraapprove the offering or the compensation payable to thebroker-dealers.Finra Rule 5123 applies to many exempt offerings,

including private placements. However, it does not applyto, among others, (i) exempt offerings sold solely toinstitutional investors, (ii) Rule 144A offerings, (iii)Regulation S offerings, (iv) exempt offerings of non-convertible debt or preferred securities that meet thetransaction eligibility criteria for registering primaryofferings of non-convertible securities on Forms S-3 and F-3, and (v) private placements of commercial paper.

Payments to third partiesFinra member firms are generally prohibited from payingto, or sharing commissions or other transaction-basedcompensation with, any person who is not a Finra memberfirm or an associated person of a Finra member firm. Oneexception to this rule is set forth in Finra Rule 2040, whichpermits the payment of referral fees to foreign persons who



refer foreign clients to the Finra member firm. Theexception is only available for payments to foreignnationals and foreign entities domiciled outside the US,and the member firm must satisfy itself that the foreignperson has not conducted any activity in the US thatwould subject it to US broker-dealer registrationrequirements. Disclosure of the referral fee must be madeto the foreign customer, who must acknowledge receipt ofsuch disclosure.

Certificates of depositAs we discuss in Chapter 7, CDs generally are consideredbank deposits, and not securities. Traditional CDs bear afixed interest rate over a fixed period and benefit fromFDIC insurance up to the insurance limit. However, theremay be non-traditional CD products, such as certainbrokered CDs or market-linked CDs, that may be moreakin to securities than traditional bank deposits. Theremay also be bundled CDs with other features that againresemble securities rather than traditional bank deposits.Traditional CDs generally fall outside of Finra supervision.Broker-dealers selling CDs that may be consideredsecurities may be subject to Finra rules. As a result, it willbe important to understand whether a CD is a bankdeposit or a security.



ENDNOTES1. There are exemptions for banks to conduct certain

types of securities business without registering as abroker-dealer.

2. For more information regarding Finra guidance onsuitability with respect to structured products, see‘Finra developments relating to the sales andmarketing of structured products’ in Chapter 13(Special considerations related to structuredproducts).

3. For more information regarding Finra Rules 2241and 2242, see our Client Alert, ‘Finra’s Final EquityResearch Rules Go Effective; Final Debt ResearchRules’ Effective Date Quickly Approaching’ (January25 2016), available at:https://media2.mofo.com/documents/160125finrafinalequitydebtresearchrules.pdf

4. The global research analyst settlement is anenforcement agreement first announced in December2002 and approved by the United States DistrictCourt for the Southern District of New York onOctober 31 2003, among the SEC, the NASD, theNYSE, the New York State attorney general and 10of the then-largest investment banking firms in theUS. The Global Settlement addressed issues relatedto conflicts of interest between the research andinvestment banking departments of these firms thatbecame apparent during the dotcom boom and thenbust of the late 1990s and early 2000s.

5. This conforms with the requirements of SECRegulation AC, which provides that research analystsmust affirm their reports reflect their personal views.

6. The JOBS Act prohibits a national securitiesassociation or the SEC from maintaining rulesrestricting research analysts from participating inmeetings with investment banking personnel and anEGC in connection with an EGC’s IPO. Prior to theenactment of the JOBS Act, research personnel wereprohibited from attending meetings with an issuer’smanagement that were also attended by investmentbanking personnel in connection with an IPO,including pitch meetings. Section 105(b) of the JOBSAct permits research personnel to participate in anycommunication with the management of an EGCconcerning an IPO that is also attended by any otherassociated person of a broker, dealer, or member of anational securities association whose functional role isnot analyst, including investment banking personnel.For more information regarding EGCs, see ‘FPIaccommodations under US securities laws’ in Chapter9 (Exchange Act registration).



https://media2.mofo.com/documents/160125finrafin


In the aftermath of the financial crisis of 2008,financial engineering engendered suspicion, andfinancial products perceived to be complex haveattracted regulatory attention. Structured products

are among the financial products that have been underincreasing regulatory scrutiny. Some of this attention maybe unwarranted and may be the result of a case of mistakenidentity. That is, financial products bearing very differentcharacteristics are often grouped together and referred to asstructured products if the products entail any structuring.For example, news articles may discuss structured financeproducts, or structured credit products, such ascollateralised debt obligations (CDOs) or collateralisedloan obligations (CLOs), in the same breath as market-linked debt securities. This undifferentiated approach hasled to a fair bit of confusion. Structured products, ormarket-linked investments, are debt securities, CDs orother instruments with cash flow characteristics thatdepend on the performance of one or more referenceassets. The prototypical structured product may be a seniornote with a return based on a popular equity index, suchas the S&P 500 Index or the Dow Jones Industrial Average(DJIA).The market for these products has proven resilient, and

has grown in recent years. These products are designed tomeet the risk/reward needs of investors and offer distinctbenefits that cannot typically be obtained from other typesof investments. However, the US regulatory frameworkapplicable to these products is difficult to navigate.Accordingly, the purpose of this chapter is to discuss recentregulatory and enforcement developments and highlightdisclosure and compliance concerns for marketparticipants, as a wide variety of non-US banks,particularly European and Canadian banks, are frequentissuers of structured products in the US.

Types of structured productsStructured products include equity-linked, index-linked,interest rate-linked, commodity-linked and currency-linkedinstruments. From a cash flow perspective, a structuredproduct may look like a combination of a traditional debtsecurity and a derivatives contract; however, structured

products are not derivatives contracts. Structured productsmay simply involve, for example, trading away a portion ofthe full potential upside associated with a direct investmentin the reference asset (such as an investment in the S&P 500Index or the DJIA) in exchange for a return of principal atmaturity (subject to the issuer’s credit risk), or in exchangefor assuming some lesser risk to the reference asset.Structured products may be structured as senior debtsecurities offered by an issuer (often a financial institutionthat is a well-known seasoned issuer) under a shelfregistration statement (if the securities are registered) or aprogramme offering circular or offering memorandum (ifthe securities are unregistered), or they may be structured asmarket-linked CDs offered by a bank.

Regulatory framework applicable tostructured productsAs a result of the various forms that structured productsmay take, there is no single regulation or body ofregulation applicable to the issuance, sale and marketing ofstructured products. First, the applicable regulatoryscheme may turn on whether the structured product is asecurity (and whether it is a registered security or anunregistered security offered in a private placement or as abank note) or a bank product. Second, the nature of thereference asset may raise particular considerations, as wediscuss below in the context of commodity-linkedproducts. Third, many structured products have distincttax benefits, so tax considerations often are central to thestructuring process. Fourth, questions may ariseconcerning the Employee Retirement Income Security Actof 1974 (Erisa), the Investment Company Act and theInvestment Advisers Act of 1940, which need to be vettedcarefully. Fifth, the nature of the investor base may raiseparticular concerns. For example, structured products thatare sold to retail investors are typically subject to higherscrutiny and more stringent regulatory requirements thanproducts sold to institutional investors. Finally, the broker-dealers that market structured products are subject toregulation by SROs, including national securitiesexchanges (e.g. NYSE and Nasdaq) and Finra.1

For issuers of structured products, there are still other

CHAPTER 13

Special considerations related to structured products


considerations that arise that are not unique to structuredproducts offerings, but rather arise in connection withsecurities offerings generally. These considerations includeissuer blackout periods, corporate authorisation of theissuance and sale of the securities and the availability of aneffective registration statement or an up-to-date offeringcircular or offering memorandum. Similarly, there areFinra regulations applicable to all securities offerings, suchas those relating to communications and underwritingcompensation, which also must be considered in thecontext of a structured products offering.

Securities liability at the time of saleMost causes of action relating to structured products thatare securities would be brought by investors alleginginsufficient or inaccurate disclosure. In December 2005,the SEC, as part of its securities offering reform, in newRule 159 under the Securities Act, codified itsinterpretation regarding the time at which liability ismeasured under section 12(a)(2) of the Securities Act. Theinformation upon which liability is based for insufficientor inadequate disclosure is established at the time of sale,or the moment the investor becomes contractuallyobligated to purchase a security. Time of sale liability alsohas been applied by market participants to unregisteredofferings, due to the concern that a court or securitiesregulator could apply the principles underlying Rule 159under the Securities Act to the context of unregisteredofferings.As a result, a seller must convey information to an

investor before an investment decision is made, and maynot correct material misstatements or omissions in theinformation conveyed to an investor after the investmentdecision is made at the time of sale. Thus, an issuer maynot avoid liability for a material misstatement or omissionin a preliminary prospectus or supplement by simplycorrecting the text of the final prospectus or supplement.Previously, a final prospectus or supplement may havebeen used to correct or supplement information that hadbeen provided to investors, but information conveyed afterthe time of sale now may no longer be considered inassessing liability. As a result of the increasing complexityof many structured products subsequent to the securitiesoffering reform, many issuers and underwriters have givenadditional thought to the disclosure documents forstructured products and have implemented revised policiesand procedures relating to the sales and marketing ofstructured products.The securities offering reform also introduced the

concept of a free writing prospectus, which is any writtencommunication used during the offering process other

than the SEC-filed statutory prospectus. Free writingprospectuses are generally not subject to any contentrequirements or restrictions, but are subject to liabilityunder section 12(a)(2) of the Securities Act (although notsection 11 of the Securities Act), as well as the anti-fraudprovisions of the US securities laws. Finra’s disclosure rulesalso regulate the content of free writing prospectuses. As aresult, distribution agreements between issuers andunderwriters of structured products, and selling groupagreements between lead underwriters and selling groupmembers, often contain detailed provisions as to the use,preparation and required approvals of offering documentsand other marketing materials.An issuer is responsible for any free writing prospectus

that is prepared by or on behalf of, or used or referred toby, the issuer. Free writing prospectuses that includemarketing information about particular types of structuredproducts or a specific structured product and hypotheticalexamples or plain English discussions of product features,are frequently being used in conjunction with theprospectus or prospectus supplement for registeredstructured products. Free writing prospectuses are alsofrequently used in lieu of a full preliminary statutoryprospectus because, in principle, the base offeringdocuments that relate to all of the issuer’s securities neednot be attached to the free writing prospectus. In addition,since there may be many variables that are determined onthe pricing or trade date for structured products, whichmay impact potential returns to an investor (e.g. trigger orbarrier prices, index levels or return caps), free writingprospectuses may be used (usually in the form of final termsheets) to convey this information at the time of sale priorto confirmation of sales. Market participants inunregistered offerings similarly use marketing materialsand final term sheets that are analogous to free writingprospectuses to provide additional information regardingproducts and product features and to convey pricinginformation.

Disclosure issuesDistributors of structured products generally will rely ondisclosures provided by the issuer and the underwriter ofthe products. However, it is important that the disclosurespresent a fair and balanced picture of the risks and benefitsof the structured product. The SEC’s prospectus disclosurerules, particularly those of Item 202 of Regulation S-K(description of securities) and Item 503 (risk factors)contain very little specific guidance that is useful in thecontext of structured products. However, a generalconsensus among market participants does exist as to theprincipal disclosures that should be made (although



practices and text differ among issuers). In addition, Finraand the SEC have in the past few years have providedhelpful guidance on disclosures related to structuredproducts.In April 2012, the SEC’s division of corporate finance

announced that it had sent a letter to certain financialinstitutions relating to their structured note offerings. TheSEC letter consisted of 14 comments, and restated certainof the SEC staff ’s views with respect to structuredproducts. For example, the SEC letter requested thatissuers evaluate the names or titles of their structuredproducts (such as the use of principal protected notes) toensure that these names are not confusing or misleading toinvestors. The SEC staff requested that issuers ensure thatprospectuses include prominent disclosures alertinginvestors that they are exposed to issuer credit risk if theypurchase structured notes. The SEC letter remindedissuers that disclaimers of responsibility for informationregarding an underlying reference asset is inconsistent withthe issuer’s obligations under the US securities laws, andthat some disclaimers of this kind may need to be revised.It also sought additional information from issuers ofstructured products. For example, the SEC letter requestedinformation as to the circumstances under which an issueror its broker-dealer affiliate repurchases notes frominvestors prior to maturity, suggesting that issuers providemore information about this in their offering documents.As discussed above, information about registeredstructured products is conveyed through a layereddisclosure approach, which includes term sheets,prospectus supplements and product supplements. Thepotential complexity of this format is an issue that hasarisen in a number of different contexts, including inconnection with the securities litigation relating toLehman Brothers’ principal-protected structured notesand the SEC’s releases relating to asset-backed securities. Inaddition, different underwriters make different uses ofshort-form, free writing prospectuses and statutoryprospectuses.The SEC letter also requested additional disclosure as to

the estimated value of structured notes on the pricing date.In February 2013, the SEC staff provided additionalguidance regarding the type of disclosure regarding pricingthat would be required. It noted that issuers must disclosethe issuer’s valuation on the cover page of the offeringdocument, and share this information with investors priorto the time of sale. This estimated value should be based onthe value of the bond component and the derivativecomponent of the offered structured note. Disclosuredocuments should include a description of the estimatedvalue, and any models used to calculate this amount, such as

the issuer’s internal funding rate or secondary marketspreads. In discussing the value of the derivative componentthat is factored into the estimated value, the issuer shouldalso discuss any valuation models or assumptions,particularly if the issuer has used inputs other than mid-market prices. The value of the derivative componentshould generally exclude the issuer’s hedging costs. Theoffering document should also include narrative disclosureexplaining the fees, costs and other amounts that may beadded to the issuer’s valuation to calculate the original issueprice of the structured notes and whether those amountsreceived from investors are used or retained by the issuer oran affiliate. Risk factor disclosure should alert potentialinvestors that the estimated value will be lower than theprice of the notes. The disclosures should also address anyrisks inherent in the valuation or pricing of the bond orderivative components, including the use of anyassumptions or internal models. The risk factors should alsoalert investors that there will not be a liquid secondarymarket for the securities, and that secondary market pricesmay be lower than the issue price. The SEC’s guidanceregarding pricing disclosure has resulted in significantchanges to the disclosures used by market participants inconnection with structured product offerings.

Type of structured productThe disclosures regarding the type of structured productand its structure must be written clearly so that the averageinvestor is able to understand how the structured productworks. The type of structured product will also determinethe type of disclosure and amount of information thatneeds to be disclosed. More complex structured products,such as highly leveraged exchange-traded notes (ETNs)with frequent rebalancing and long/short strategies,structured products linked to proprietary indices orhypothetical bond/yield curves and commodity-linkedstructured products with reference assets consisting ofhypothetical baskets of futures contracts, may require asignificant amount of disclosure to explain how thereference assets or baskets are constructed or composedand returns are calculated. Depending on the structuredproduct, there also may be restrictions related to thepotential investors. Certain structured products may onlybe offered to accredited investors or only to options-eligible accounts, or may be subject to minimumdenomination requirements, and certain structuredproducts may not be appropriate for Erisa accounts.

Structured product namesDistributors should ensure that structured product namesare not confusing or misleading to investors. For example,



both Finra and the SEC have expressed concerns regardingthe use of the term principal protection without providingaccompanying prominent disclosure concerning issuercredit risk. The concern stems from the fact that anunsecured obligation to make principal payments does noteliminate the risk that if the issuer goes into bankruptcy, itmay not have sufficient funds to make such principalpayments to investors.

Credit riskAll disclosure and marketing documents should emphasisethat structured products are subject to issuer credit risk. Inlight of the potential challenges facing financialinstitutions, market participants should monitor changesin the issuer’s creditworthiness, reflected in the issuer’scredit ratings. Distributors must have procedures in placefor notifying potential investors of changes in issuer creditratings, or of any emerging risks affecting an issuer.

Risk disclosuresSpecial attention should be paid to highlighting clearly therisks associated with the structured product, including thelack of a liquid secondary market, the special tax featuresof the structured product, actual or potential conflicts ofinterest, and risks specific to particular payout structures.Again, the more complex the structured product, thegreater the level of risk disclosure that should be includedin the relevant offering document. And needless to say, thelength of the risk factor section will not help ensure againstUS securities liability if the content of the risk factors doesnot adequately explain the specific risks inherent in thestructured product.

FeesInvestors should understand the fees and commissionsassociated with the structured product. As a result, issuersand distributors should aim to provide transparency withrespect to the disclosure on fees and commissions. Theexistence of embedded fees and costs will add to theperception that the structured product is complex and thuswill impact Finra suitability requirements (which wediscuss below).

Broker-dealer standard of careThe distributors of structured products are predominantlybroker-dealers who owe various duties to their customers,which include the duty to recommend so-called suitableinvestments, the duty to obtain best execution wheneffecting trades and the duty to charge fair commissions ormark-ups. Finra rules further require that member firmsensure that their communications with customers and the

public are based on principles of fair dealing and goodfaith, are fair and balanced and provide a sound basis forevaluating any particular security or service. Riskdisclosures in a prospectus or supplement do not curedeficient disclosure in sales or marketing materials. FinraRule 2090, commonly referred to as the know-your-customer rule, requires that member firms performreasonable diligence, with respect to the opening of everyaccount, and to know (and retain) the essential factsconcerning every customer.Finra Rule 2111 requires that Finra members have a

reasonable basis for determining that a structured productmay be suitable for investors in general (commonlyreferred to as reasonable-basis suitability) and that it issuitable for each specific customer (commonly referred toas customer-specific suitability), prior to recommendingthe purchase or sale of a security. Customer-specificsuitability often is the more quantitative suitabilityassessment of the two types of suitability. Finra Rule 2111further requires member firms to make reasonable effortsto obtain information concerning:• the customer’s financial status;• the customer’s tax status;• the customer’s investment objectives;• the customer’s time horizon;• the customer’s liquidity needs;• the customer’s risk tolerance; and• any other information considered reasonable by theFinra member or registered representative in makingrecommendations to the customer.Registered representatives of the broker-dealer also must

familiarise themselves with each customer’s financialsituation, trading experience and ability to incur the risksinvolved with the relevant security.

Finra developments relating to the sales andmarketing of structured productsNotices to members 3-71, 5-26 and 5-59Finra (and its predecessor, the NASD, referred to hereinthroughout as Finra) have issued various notices tomembers and alerts that relate directly to the sales andmarketing of structured products. In November 2003,Finra issued Notice to Members 3-71 regarding non-conventional investments, which was followed in April2005 by Notice to Members 5-26 regarding new productsand in September 2005 by notice to members 5-59regarding structured products. The three notices raise similar issues. Finra notes that

members must develop and implement written proceduresto identify and consider new products, as well as post-approval follow-up and review procedures. It reminds



members that, in order to discharge their suitabilityobligation in connection with marketing and selling newproducts or structured products, they should conductadequate diligence. Finra members should conduct thediligence necessary to permit them to understand productfeatures. The nature of the diligence will vary by product,but should take into account distinct product features andshould include an understanding of the liquidity of theproduct, the creditworthiness of the issuer, the principal,return and/or interest rate and the tax consequences. In Notice to Members 5-59, Finra notes that members

should consider whether an investment meets thereasonable-basis suitability standard if it is priced such thatthe potential yield is not an appropriate rate of return inrelation to the volatility of the reference asset based oncomparable or similar investments. Given that structuredproducts are varied, comparing the yield/volatility profileof similar investments may pose challenges. Finra membersalso must perform a customer-specific suitability analysisto ensure that an investment in the product is suitable ona customer-by-customer basis. This requires taking intoaccount the customer’s financial and tax status, investmentobjectives and other similar information, without placingundue reliance on net worth alone. Notice to Members 5-59 also suggests that Finra members consider whether aninvestor meets the suitability requirements for optionstrading.Any offering or sales material should provide balanced

disclosure of the risk and rewards associated with theparticular product, especially when selling to retailinvestors. In particular, the notices emphasise that manyunique features associated with structured products maynot be readily understood by retail investors. Finramembers should avoid potentially misleadingcharacterisations of structured products in offering or salesmaterials (for example, referring to the products asincome-producing, conservative or yield-enhancing).Notice to Members 5-59 also notes that offering materialsthat omit a description of the derivative component of theproduct and instead present such products as ordinarydebt securities would violate Finra Rule 2210.Offering documents should also highlight and explain

the risks associated with structured products, whichgenerally include market risk and the potential loss ofprincipal interest rate risk, a risk of embedded leverage, therisk of reduced liquidity, issuer credit risk, uncertain taxtreatment or adverse tax consequences and the possibilitythat there may not be any current income for the holder.Risks specific to each product or structure also should beexplained.

Regulatory notices 09-73, 10-09 and 10-51Following the failure of Lehman Brothers in September2008, holders of Lehman Brothers structured products,including principal-protected products, faced losses. Inlegal or regulatory actions, holders of Lehman Brothersprincipal-protected notes alleged that they believed thatthe term principal-protected meant repayment of principalwas guaranteed, and did not understand that the noteswere senior unsecured debt obligations of the issuer,subject to issuer credit risk. Regulators took note andissued new guidance. In December 2009, Finra releasedRegulatory Notice 09-73 regarding principal protectednotes, which reminds Finra members thatcommunications must be fair and balanced and provideappropriate disclosures, including disclosures regardingissuer credit risk. Finra cautions that Finra membersshould conduct reasonable suitability assessments prior torecommending principal-protected notes. Finally, Finraemphasises that its members must train their registeredrepresentatives regarding the terms, conditions, risks andrewards of these products.In 2010, Finra issued Regulatory Notice 10-09

regarding reverse convertible securities, which had becomequite popular. The notice focuses on sales and marketingcommunications relating to reverse convertibles andrecommended that Finra members ensure investorsunderstand that reverse convertibles do not provide forprincipal protection; as a result, investors may experiencelosses on their investments. As commodity-linked products became increasingly

popular, Finra issued Regulatory Notice 10-51 regardingcommodity futures-linked securities, reminding firms oftheir sales practice obligations for such products. Thenotice highlights certain of the risks that may result fromthe methodologies used in connection with commodityfutures-linked securities, including possible deviationbetween the performance of the commodity futures-linkedsecurity and the performance of the referencedcommodity.

Regulatory Notice 12-03In January 2012, Finra issued Regulatory Notice 12-03regarding complex products. The notice identifies the typesof products that may be considered complex and providesguidance to Finra members regarding supervisory concernsassociated with sales of complex products. The notice makesclear that in Finra’s view, member firms have heightenedobligations in respect of the sale of complex products. It alsohighlights the additional steps to be taken in connectionwith new product review, training, suitability assessmentsand post-sale review for complex products.



Enforcement actionsIn addition to providing regulatory guidance, Finra alsohas pursued enforcement actions against member firmsinvolved in structured product sales. Generally, theseenforcement actions have involved the misselling ofstructured products, the lack of appropriate training andinsufficient supervisory procedures.

Useful remindersIssuers of structured products and the broker-dealers thatdistribute structured products should anticipate thatregulators will remain focused on this area. Consistentwith their objective of protecting investors, regulators willseek to reduce complexity for retail investors and seekgreater transparency and clarity in structured productdisclosures. Moreover, given economic uncertainty and thelosses borne by investors in complex structured creditproducts in the past, concerns are likely to continue to beraised as to whether market-linked products are toocomplex for retail investors. Many of these discussions arelikely to gloss over the distinctions between complexityand riskiness, and may fail to distinguish among differenttypes of retail investors with differing levels ofsophistication.In light of the regulatory environment, broker-dealers

should take care to:• review their new product approval process;• adopt detailed policies and procedures that address thedistinct issues posed by structured products;

• address know-your-customer and suitability obligations,recognising that special procedures will be required inrespect of structured products;

• implement approaches to monitor concentration ofstructured products, single issuer exposures and tradesprior to maturity in client accounts;

• document a process or policies and procedures regardingthe pricing of structured products and secondary marketactivities;

• design comprehensive mandatory training andeducation specific to structured products;

• focus on disclosures in offering documents and othermarketing materials; and

• document arrangements with distributors of structuredproducts and vet distributors carefully based on know-your-distributor (KYD) procedures.Special attention should also be paid to product names,

descriptions of payout structures and product features, andclear discussions of the product’s risks, including the lackof a secondary market, the special tax features, the buy-and-hold nature of the product, the fees and expensesassociated with the product and the potential conflicts of

interest presented by the investment.As with offerings involving other types of products,

broker-dealers should consider carefully their existingpolicies and procedures related to information walls inorder to, among other things, help ensure that from acompliance perspective, product marketers are walled offfrom research analysts. In addition, broker-dealers shouldwindow-clean in order to make sure that they have apolicies and procedures for:• vetting underlying stocks that may be reference assets orconstituents of a narrow-based index that is a referenceindex;

• licensing indices for use in structured products;• generating accurate and descriptive account statementsthat properly describe the products that customers havepurchased;

• vetting any marketing materials with Finra and filingany such materials with Finra; and

• complying with trade reporting rules.There also are a number of changes on the horizon,

including those that may arise as a result of ongoingrulemaking in connection with the Dodd-Frank Act. Forexample, the possible imposition of a fiduciary duty onbroker-dealers is likely to affect the structured productsmarket.

Bank regulatory issues arising from hedgingBanks or their branches should consider closely theregulatory issues that may arise in connection with theissuance of structured products. To the extent that aforeign bank or branch seeks to issue structured productsfrom the bank in reliance on the section 3(a)(2) exception,the foreign bank or branch should consult with counselconcerning the types of products it intends to issue. Inaddition, the foreign bank should consult with itsprincipal regulator. The New York department of financialdervices has published several rulings regarding linkedsecurities, although these, by and large, address noteslinked to broad-based indices. A foreign bank also shouldconsider the FDIC’s guidance in respect of domestic retaildeposits. An uninsured foreign bank branch will want tomake certain that any structured notes are consideredsecuritiesand not deposit products. Finally, a foreign bankwill want to consider carefully how the exposures arising inrespect of structured products it issues are hedged.Depending on the structure of the foreign bank, hedgingthe associated exposures may raise regulatory concerns.



ENDNOTE1. For more information regarding Finra, see Chapter 12

(Regulation by the Financial Industry RegulatoryAuthority).



The US-Canadian multijurisdictional disclosuresystem (MJDS) was adopted in July 1991 bythe SEC and the Canadian SecuritiesAdministrators. It is designed to facilitate

cross-border public offerings of securities between the USand Canada. The MJDS allows eligible Canadian issuers tomake registered public offerings in the US using aprospectus prepared and reviewed in Canada that ismainly, although not exclusively, in accordance withCanadian disclosure requirements. The MJDS also allowseligible issuers to comply with US continuous reportingrequirements by filing their Canadian disclosuredocuments with the SEC (subject to certain additional USdisclosure and corporate governance requirements). MJDSofferings can be made on a US-only basis or in connectionwith a concurrent offering in Canada.

Although less frequently used, there is also a reciprocalMJDS which allows eligible US issuers to make publicofferings in Canada using a prospectus preparedpredominantly in accordance with the requirements of,and reviewed by, the SEC.1

Advantages of using the MJDSThe MJDS registration process avoids duplicativeregulatory review and reduces the costs, time and otherburdens of complying with two disclosure regimes,allowing eligible Canadian issuers to more easily access theUS capital markets.

The principal advantages of using the MJDS aresummarised below:• Streamlined registration statement. The MJDS

registration statement filed with the SEC consists of aprospectus prepared mainly, although not exclusively, inaccordance with Canadian disclosure requirements. It isgenerally wrapped around a Canadian prospectus. Theprospectus, which is filed as part of the MJDSregistration statement, includes a list of all of thedocuments filed as part of the registration statement andcertain legends to notify US investors that theregistration statement was prepared in accordance withCanadian disclosure requirements. The prospectus filedwith the SEC may omit information that is applicable

exclusively to Canadian investors and not material to USinvestors. The required exhibits that must be filed as partof an MJDS registration statement include copies of alldocuments incorporated by reference in the prospectus,and all documents required to be filed or made public inCanada such as experts’ written consents and certainmaterial agreements.

• Limited SEC review and automatic effectiveness. Whilethe SEC reserves the right to review filings on MJDSregistration forms, they generally do not. Instead, theSEC typically defers to home jurisdiction review inCanada, unless there is reason to believe there is aproblem with the filing. If an offering of securities isbeing made contemporaneously in the US and Canada,an MJDS registration statement will generally becomeeffective automatically upon filing with the SEC, unlessa Canadian preliminary prospectus is being filed initiallyas part of the MJDS registration statement in order topermit offers in the US prior to effectiveness. If anMJDS registration statement relates to a US-onlyoffering, the issuer will file the preliminary prospectuswith one Canadian provincial securities regulator,typically in the issuer’s home province. The MJDSregistration statement will be declared effective after theSEC receives a copy of a receipt or notification ofclearance from the principal provincial securitiesregulator.

• Simplified continuous reporting. Similar to any US publicoffering, the filing of an MJDS registration statementwill generally create a continuous reporting obligationunder sections 13 or 15(d) of the Exchange Act.However, under the MJDS, Canadian issuers cangenerally satisfy these continuous reporting obligationsby filing their Canadian continuous disclosuredocuments with the SEC. Annex A to this documentincludes a summary comparison of the MJDS forms ascompared to other SEC registration forms.

Issuers eligible for the MJDSGenerally, to be eligible to use the MJDS, an issuer must:• be incorporated or organised under the laws of Canada

or any Canadian province or territory;


CHAPTER 14

The US-Canadian multijurisdictionaldisclosure system


• be an FPI;• have been subject to the continuous disclosure reporting

requirements for the preceding 12 calendar months witha Canadian securities regulatory authority (36 monthsfor Forms F-7, F-8 and F-80), and in compliance withthose reporting requirements;

• have a public float of outstanding equity securities heldby persons other than its affiliates of $75 million ormore; and

• not be an investment company registered or required tobe registered under the Investment Company Act.The $75 million public float requirement can serve as a

barrier to use of the MJDS, particularly for:• companies that are not yet public and are planning a

simultaneous US and Canadian initial public offering;• smaller Canadian public companies; and• Canadian public companies that have a significant

percentage of their shares held by members of themanagement team or other affiliates. These types ofcompanies will often need to commence any USregistration using the more detailed US forms, such asForm F-1.Eligible MJDS issuers are not required to use the MJDS.

All Canadian issuers that qualify as FPIs are eligible to usethe SEC’s foreign issuer forms (Forms F-1, F-3 and F-4)for registration of public offerings under the Securities Act,and for continuous reporting under the Exchange Act(Forms 20-F and 6-K). US domestic offering forms (FormsS-1, S-3 and S-4) and continuous reporting forms (Forms10-K, 10-Q and 8-K) are generally available to Canadianissuers that voluntarily choose to use them.

However, Canadian issuers are not required to use themunless they no longer qualify as FPIs.

WKSIsGenerally, a well-known seasoned issuer (WKSI) is anissuer that is required to file reports with the SEC undersection 13(a) or section 15(d) of the Exchange Act and asof a date within 60 days of filing its shelf registrationstatement, either (1) has a worldwide market value of itsoutstanding voting and non-voting common stock held bynon-affiliates of $700 million or more or (2) has issued inthe last three years at least $1 billion aggregate principalamount of non-convertible securities in registered primaryofferings for cash.

A WKSI benefits from a more flexible registrationprocess and is able to register unspecified amounts ofsecurities in the US under a shelf registration statementthat can be used for most offerings and becomes effectiveautomatically upon filing with the SEC.

Only issuers that file annual reports on Form 10-K or

Form 20-F with the SEC are eligible to be a WKSI. TheSEC has confirmed that Canadian issuers filing annualreports on Form 40-F under the MDJS will not qualify forWKSI status. Canadian issuers are not required to use theMJDS and may file their annual reports with the SEC onForms 20-F or 10-K in order to become a WKSI. Utilisingeither of these two approaches, however, will subject aCanadian issuer to the burden of complying with anadditional set of different, ongoing and more stringentdisclosure requirements, which they are not subject tounder the MJDS.2

Securities eligible for the MJDSAll securities are eligible for the MJDS, except for certaintypes of derivative securities, as discussed below. Whilerights offerings are eligible for the MJDS, only thesecurities issuable upon exercise of those rights are freelytransferable in the US.

Registered offerings under the Securities Act MJDS issuers effect public offerings in the US on FormsF-7, F-8, F-10 and F-80.• Form F-7 – rights offerings. Form F-7 is used for the

registration of securities offered for cash upon theexercise of rights to purchase or subscribe for suchsecurities that are granted proportionately to existingsecurity holders. To be eligible for Form F-7, an issuermust have a class of its securities listed on the TorontoStock Exchange or the Senior Board of the TorontoVenture Exchange for the 12 calendar monthsimmediately preceding the filing of Form F-7, and meetthe conditions described in ‘Issuers eligible for theMJDS’ above. However, the public float requirement isnot applicable.

• Form F-10 – general. Form F-10 is the most frequentlyused MJDS form and may be used to register any kindof security by an eligible issuer meeting the conditionsdescribed in ‘Issuers eligible for the MJDS’ above. FormF-10 can only be used for derivative securities when theyare warrants, options, rights and convertible securitiesthat are issued by the registrant, and are convertible onlyinto securities of the registrant or one of its affiliates.Registration on Form F-10 requires that financialstatements included in or incorporated by reference bereconciled to US GAAP or prepared in accordance withIFRS as issued by the IASB.

• Forms F-8 and F-80 – acquisitions and othertransactions. Forms F-8 and F-80 may be used for theregistration of any security, except a derivative security(other than certain warrants, options, rights andconvertible securities), to be issued in connection with



an exchange offer or in connection with a statutoryamalgamation, merger, arrangement or otherreorganisation requiring a shareholder vote (a businesscombination). Each of these forms can facilitate mergertransactions involving Canadian companies in which aportion of the target’s shareholders reside in the US.To be eligible for Forms F-8 and F-80, an issuer musthave a class of its securities listed on the Toronto StockExchange or the Senior Board of the Toronto VentureExchange for the 12 calendar months immediatelypreceding the filing of Forms F-8 and F-80 and meet theconditions described in ‘Issuers eligible for the MJDS’above. However, the public float requirement, which isstated in Canadian dollars, need not be satisfied if theissuer of the securities to be exchanged is also theregistrant on the applicable Form F-8 or F-80.Generally, Form F-8 may be used where US holders ownless than 25% of the target securities, and Form F-80may be used where US holders own less than 40% of thetarget securities. In the event that Forms F-8 and F-80are unavailable, certain exchange offers and businesscombinations may be registered on Form F-10, subjectto eligibility requirements.

• Recission of Form F-9. On December 31 2012, as part ofits rule revisions relating to the reduction of its relianceon credit ratings, the SEC rescinded Form F-9. Thisform was previously used to register investment gradedebt and preferred securities under the MJDS. MJDScompanies who would have been eligible to use Form F-9 must now use Form F-10. However, there is aneligibility gap between Form F-10 and F-9 where F-9filers were not required to have a public float of $75million or have the registered securities guaranteed by aparent that meets the $75 million public floatrequirement. This eligibility gap between Forms F-10and F-9 prevents companies who would have beenMJDS-eligible on Form F-9 from accessing the MJDS.Moreover, removal of Form F-9 references from Form40-F caused MDJS companies who were eligible to useForm 40-F based on their registration on Form F-9 to beno longer eligible to use Form 40-F and required themto file on Form 20-F, which requires disclosure inaccordance with SEC standards rather than Canadiandisclosure rules.In order to address this eligibility gap, the SEC adopteda temporary grandfathering provision that permittedregistrants who would have been eligible to use Form F-9 as of December 31 2012 to file on Form F-10 withoutsatisfying the public float or parent guaranteerequirement until December 31 2015. The SEC alsoadopted a permanent grandfathering clause allowing

filers who have filed and sold securities under a Form F-9 before December 31 2012 to continue to be eligible touse Form 40-F to satisfy their Exchange Act reportingrequirements.Securities linked to currencies, commodities, stocks orindexes (also referred to as structured notes) werepreviously eligible for registration on Form F-9.However, they are no longer eligible for the MJDS andmust be registered using the foreign forms (F-1, F-3 andF-4) or the US domestic forms (S-1, S-3 and S-4), asapplicable. Canadian financial institutions that issuestructured notes typically register these offerings onForm F-3.3

Contents of an MJDS registration statementThe MJDS registration statement filed with the SECconsists of a cover page, prospectus, exhibits, undertakingsand consent to service of process as described below.

The cover page contains basic information relating tothe issuer, calculation of the registration fee and a checkbox which must be selected if the securities are to beoffered on a delayed or continuous basis under the homejurisdiction’s shelf prospectus offering procedures. Issuersregistering on Form F-10 must set forth the approximatedate of commencement of the proposed sale of thesecurities to the public.

The prospectus is governed largely, although notexclusively, by Canadian disclosure requirements with afew modifications, such as the addition of certain legendsand a list of all documents filed as part of the registrationstatement. Information relating solely to Canadianinvestors and not material to US investors may be omittedfrom the prospectus. The exhibits that must be filed as partof an MJDS registration statement include copies of alldocuments incorporated by reference in the prospectus,and all documents required to be filed or made public inCanada such as experts’ written consents and certainmaterial agreements.

With the exception of Form F-7, an issuer mustundertake to make available to the SEC, upon request,information relating to the securities registered. In the caseof an exchange offer, an issuer using Forms F-8 or F-80must undertake to disclose in the US, on the same basis asit is required to make such disclosure in Canada under anyapplicable Canadian law, regulation or policy, informationregarding purchases of the issuer’s securities.

The issuer and any non-US person acting as trusteemust file a written irrevocable consent and power ofattorney on Form F-X.



Information from a Canadian prospectus that can beomitted from a US registration statement filed underthe MJDSA US registration statement filed under the MJDS mayomit disclosure that is applicable only to Canadianinvestors and not material to US investors, including:4

• any Canadian red herring legend;• any discussion of Canadian tax considerations not

material to US investors;• the names of any Canadian underwriters not acting as

underwriters in the United States;• any description of the Canadian plan of distribution

(except to the extent necessary to describe the materialfacts of the US plan of distribution);

• any description of investors’ statutory rights underapplicable Canadian securities law; and

• certificates of the issuer or any underwriter that arerequired under Canadian securities law.

US GAAP reconciliation requirements that areapplicable to MJDS registration statementsForm F-10 requires reconciliation of all financialstatements to US GAAP as required by Item 18 of Form20-F. Reconciliation to US GAAP is not required if thefinancial statements are prepared in accordance with IFRSas issued by the IASB. US GAAP reconciliation is notrequired for the registration of securities on Forms F-7, F-8 or F-80.

Financial statements included in MJDS registrationstatements must satisfy SEC rules regarding auditorindependence, with the exception of registrationstatements on Form F-7.

Canadian issuers with financial statements prepared inaccordance with IFRS as issued by the IASB must alsoprovide their financial statements included on Forms 40-For 6-K and on their corporate websites in interactive dataformat using XBRL (eXtensible Business ReportingLanguage).

Canadian and US jurisdictions where MJDSregistration statements will be filedA Canadian issuer conducting a public offering ofsecurities in the United States under the MJDS must file aprospectus with the securities regulators in all of theCanadian territories and provinces where the securities willbe offered. Regardless of the number of jurisdictions inwhich the prospectus is filed, only the principal provincialsecurities regulator and, if applicable, the OntarioSecurities Commission, will review the prospectus.Generally, the determinations of the principal regulatorwill bind all of the other provincial securities regulators

where the prospectus is filed, absent unusualcircumstances. For US-only offerings, a Canadian issuermust file the prospectus with the provincial securitiesregulator in the jurisdiction where the issuer’s head officeis located.

Subject to the limitations imposed by the NationalSecurities Markets Improvement Act and absent anapplicable exemption, a state filing requirement may betriggered in each US state where offers and sales will bemade.

How SEC filing fees are calculated for MJDSofferingsAll MJDS offerings require the payment of an SEC filingfee in US dollars. The fee is based on the aggregate dollaramount of securities registered. Only securities offered inthe US need to be registered; however, the possibility offlow back into the US if the securities are concurrentlyoffered in Canada and the US should be considered. Thefiling fee is calculated according to section 6(b) of theSecurities Act and can vary from year to year. The SECfiling fee for MJDS offerings is the same as for other SEC-registered offerings.

SEC review of MJDS registration statementsWhile the SEC reserves the right to review MJDSregistration statements, it generally does not. Instead, theSEC typically defers to home jurisdiction review inCanada unless there is reason to believe there is a problemwith the filing. However, as required under section 408 ofthe Sarbanes-Oxley Act, the SEC will review, at least everythree years, the periodic filings of MJDS filers whosesecurities are listed on a US national securities exchange.Accordingly, the issuer may receive written comments as tothese filings.

Non-MJDS forms and registering securities An MJDS issuer can use non-MJDS forms to registersecurities in the US. An MJDS issuer can register itssecurities in the US using the foreign forms (F-1, F-3 andF-4) or the US domestic forms (S-1, S-3 and S-4). Unlikethe MJDS forms, the foreign forms and US domesticforms are subject to substantive review by the SEC andrequire presentation of information in accordance with USdisclosure standards.

Finra rules and regulations MJDS offerings are subject to review by Finra. Unless anexemption is available, a filing consisting of theregistration statement and draft underwriting agreementmust be made with Finra and a filing fee paid within one



business day of filing with the SEC. The SEC will notdeclare a registration statement effective until it hasreceived a no-objection letter from Finra with respect tothe terms of the underwriting arrangement and the plan ofdistribution.

Certain offerings are exempt from Finra review. Theseinclude, among others, offerings of:5

• securities of an MJDS issuer registered with the SEC onForm F-10 and offered under the Canadian shelfprospectus offering procedures;

• securities offered in a redemption standby firmcommitment underwriting arrangement registered withthe SEC on Form F-10;

• securities of a corporate, foreign government or foreigngovernment agency issuer that has unsecured non-convertible debt with a term of issue of at least fouryears, or unsecured non- convertible preferred securities;

• non-convertible debt securities and non-convertiblepreferred securities rated by a nationally-recognisedstatistical rating organisation in one of its four highestgeneric rating categories; and

• exchange offers of securities where the issuer qualifies toregister securities with the SEC on registration statementForms S-3, F-3 or F-10.

MJDS offerings of debt securities and the TrustIndenture Act of 1939 Public offerings of debt securities are generally subject tothe Trust Indenture Act of 1939, as amended (TrustIndenture Act). The Trust Indenture Act requires, amongother things, the appointment of an independent andqualified trustee to act for the benefit of the holders of debtsecurities, and specifies a variety of substantive provisionsthat must be included in the trust indenture. The TrustIndenture Act requires the trustee to be a corporationsubject to supervision or examination by a regulatoryauthority in the United States.

The SEC adopted exemptive rules under the TrustIndenture Act intended to facilitate MJDS offerings. Rule10a-5 under the Trust Indenture Act permits Canadiantrust companies subject to supervision or examinationunder the Canadian Trust Companies Act or the CanadaDeposit Insurance Corporation Act to act as the trustee forMJDS debt offerings. In addition, Rule 4d-9 under theTrust Indenture Act exempts Canadian trust indenturesused to issue debt securities under the MJDS from nearlyall of the substantive requirements of the Trust IndentureAct, provided the trust indentures are subject to theCanada Business Corporations Act, the Bank Act(Canada), the Business Corporations Act (Ontario) or theBusiness Corporations Act (British Columbia). The

Canadian trustee is also required to file a consent to serviceof process on Form F-X as part of each MJDS registrationstatement.

Shelf offerings MJDS issuers are able to effect shelf offerings in both theUnited States and Canada by establishing a Canadian shelfprospectus in accordance with Canadian shelf rules andconcurrently filing a Form F-10 with the SEC. TheCanadian shelf rules are similar to the SEC rules forcontinuous or delayed offerings of securities under Rule415 of the Securities Act. Once a Canadian shelfprospectus has been filed with the issuer’s principalprovincial securities regulator in Canada, a receipt ornotification of clearance will be issued.

The SEC must receive this receipt in order for the FormF-10 to become effective. The shelf prospectus may beused for a period of 25 months before a new shelfprospectus must be filed in Canada. For 25 months afterthe date the receipt or notification of clearance is issued, anissuer may then issue any combination of debt or equitysecurities off the shelf (depending on the types of securitiescontemplated by the shelf prospectus) in the US, Canada,or both, by filing and delivering a prospectus supplementfor each shelf offering. The prospectus supplement settingforth the terms of the specific takedown will be filed withthe issuer’s principal securities regulator in Canada inaccordance with Canadian shelf prospectus rules on orbefore the date it is first delivered or, if earlier, two businessdays after pricing. A corresponding prospectus supplementto the shelf prospectus must be filed with the SEC inelectronic format on the Edgar system within one businessday of being filed in Canada. Each SEC filing will set forththe applicable registration fee and include the followinglegend in the upper right-hand corner of the cover page:

‘Filed pursuant to General Instruction II.L. of Form F- 10;File No. 333-[insert number of the registration statement].’

The Canadian shelf rules allow a final receipt to beissued before the offering price is determined, and aresimilar to Rules 430A and 424(b) under the Securities Act.Although the MJDS forms do not allow Rules 415, 424(b)or 430A under the Securities Act to be relied upon in anMJDS offering, they permit the use of the correspondingCanadian rules in accordance with General InstructionII.L. to Form F-10.6

US state securities laws MJDS offerings exempt from state securities lawsSecurities offerings in the US, including offerings byMJDS companies, are exempt from state registration in theUS if the security being offered is a covered security as



defined under section 18 of the Securities Act.A covered security is:

• a security that is listed or authorised for listing on theNYSE, Nasdaq or a US national securities exchange withsubstantially similar listing standards as the NYSE orNasdaq;

• a security that is equal in seniority or that is senior to asecurity listed or authorised for listing on the NYSE,Nasdaq or a US national securities exchange with sub-stantially similar listing standards as the NYSE orNasdaq;

• a security offered and sold only to qualified purchasers; or• a security issued under section 4 of the Securities Act,

subject to certain restrictions.However, US state antifraud laws still apply to these

transactions and registrants must comply with US state feerequirements and filing requirements that are solely fornotice purposes.

Registration by coordinationIf the offered securities are not covered securities, the issuermust comply with applicable US state securities laws. SomeUS states will provide an exemption for securities registeredwith the SEC, but may require filing of a notice of intentionto sell. Most US states have adopted the Uniform SecuritiesAct’s registration by coordination provisions, which allow aregistration statement to become effective in such US statesupon, among other requirements, notice to US stateadministrators of an effective registration statement with theSEC and filing of the registration statement seven days priorto the effective date with US state administrators. US statesthat have not adopted the Uniform Securities Act’sregistration by coordination provisions have accommodatedMJDS registrants by providing automatic effectiveness ofthe registration statement when it is declared effective by theSEC, providing an exemption from registration uponpayment of a fee and the filing of a disclosure documentseven days before the offering is made or expediting thereview process.

Exchange Act reporting MJDS companies will be subject to the reportingrequirements under the Exchange Act upon registering anoffering on the MJDS forms. They may satisfy theirreporting requirements by filing Canadian periodicdisclosure filings on Form 40-F for annual reports andForm 6-K for interim reports, supplemented by additionaldisclosure requirements under the Dodd- Frank Act andthe Sarbanes-Oxley Act that are reflected in theinstructions to Form 40-F. Forms 40-F and 6-K must befiled in English.

The SEC generally will not review periodic reports filedusing the MJDS forms. Instead, the SEC will typically relyon the review conducted by Canadian regulators.However, as required under section 408 of the Sarbanes-Oxley Act, the SEC will review, at least every three years,the periodic filings of MJDS filers whose securities arelisted on a US national securities exchange.

Exchange Act filing exemptions Rule 12g3-2 under the Exchange Act exempts FPIs fromthe periodic reporting requirements under sections 13(a)and 15(d) of the Exchange Act. Rule 12g3-2(a) exemptsissuers with fewer than 300 holders resident in the US andRule 12g3-2(b) exempts FPIs that (1) are not subject toExchange Act periodic reporting requirements; (2)currently maintain a listing on an exchange in their homejurisdiction that is their primary trading market; and (3)publish disclosure documents made public in their homejurisdiction on their website or through an electronicinformation delivery system. These exempt issuers are alsoexempt from the corporate governance, accounting andcertification requirements of the Sarbanes-Oxley Act, sincethey do not have securities registered under the ExchangeAct. MJDS companies whose periodic reportingobligations arise solely from filing a Form F-7, F-8 or F-80are exempt from the reporting requirements of section15(d) of the Exchange Act under Rule 12h-4 of theExchange Act.

Sections 14 and 16 of the Exchange ActRule 3a12-3 under the Securities Act exempts FPIs,including MJDS companies, from complying with the USproxy solicitation rules under section 14 (except for thetender offer related provisions) and section 16 of theExchange Act. Therefore, an MJDS company does nothave to file with the SEC a proxy statement prepared inaccordance with Schedule 14A, and is exempt from certainreporting obligations and the short-swing trading profitand insider trading recovery rules under section 16 of theExchange Act. However, MJDS companies will typicallyfile with the SEC the Canadian version of the proxystatement called the Management Proxy Circular orManagement Information Circular on Form 6-K.

Form 40-FMJDS companies may use Form 40-F to file their annualreport. The Form 40-F must be filed on the same day thatthe information included in the form is due to be filedwith the applicable Canadian securities commission orregulatory authority. Form-40 includes the issuer’s annualinformation form (the Canadian version of an annual



report), audited annual financial statements andmanagement’s discussion and analysis for the fiscal yearended prepared in accordance with Canadian disclosurerequirements. In addition, under the requirements of theSarbanes-Oxley Act, the issuer must include:• a management’s annual report on internal control over

financial reporting;• an attestation report from a registered public accounting

firm on management’s assessment of internal controlover financial reporting; and

• additional disclosure on:- disclosure controls and procedures;- internal control over financial reporting;- any financial experts on their audit committee or

lack thereof;- principal accountant fees and services;- off-balance sheet arrangements; and- tabular disclosure of contractual obligations.A Form 40-F filer also is required to include as exhibits

copies of:• materials incorporated by reference;• certifications required under sections 302 and 906 of the

Sarbanes-Oxley Act from each principal executive officerand principal financial officer, or persons performingsimilar functions at the time the Form 40-F is filed;

• any notices required by Rule 104 of Regulation BTRsent in the past fiscal year to directors and executiveofficers concerning any equity security subject to ablackout period;

• a copy of the filer’s code of ethics; and• a Form F-X for service of process information in the US,

unless a Form F-X was previously filed with aregistration statement.At this time, Form 40-F filers do not have to include

exhibit hyperlinks in their exhibit lists for exhibits thatwere previously filed with the SEC.

US GAAP reconciliation and Form 40-FIf the financial statements included in the Form 40-F areprepared in accordance with IFRS, reconciliation to USGAAP is not required. All publicly accountable enterprisesin Canada have transitioned to IFRS for their financialyears beginning on or after January 1 2011 under the rulesadopted by the Canadian Securities Administrators.

Form 6-KReporting requirements under the Exchange Act requirean FPI to furnish interim reports on the basis of theirhome country’s regulatory and stock exchange practices,rather than the quarterly reports on Form 10-Q andcurrent reports on Form 8-K required for US companies.

An MJDS company may use Form 6-K to furnish (1)information it has made public or is required to makepublic under Canadian securities laws, (2) information ithas filed or is required to file with the applicable stockexchange on which its securities are traded, and (3)information it has distributed or is required to bedistributed to its shareholders. This information is limitedto material information with respect to the MJDScompany and its subsidiaries and may be related to any ofthe following:• changes in business;• changes in management or control;• acquisitions or dispositions of assets;• bankruptcy or receivership;• changes in the MJDS company’s certifying accountants;• financial condition and results of operations;• material legal proceedings;• changes in securities or in the security for registered

securities;• defaults upon senior securities;• material increases or decreases in the amount of

securities or indebtedness outstanding;• the results of the submission of matters to a vote of

security holders;• transactions with directors, officers or principal security

holders;• the granting of options or payment of other

compensation to directors or officers; and• any other information which the MJDS company deems

as materially important to its shareholders.This information must be furnished promptly after the

information is made public, and a copy of any informationincorporated by reference must be attached as an exhibit tothe Form 6-K. Information on Form 6-K is deemedfurnished, and not filed for liability purposes under section18 of the Exchange Act.

However, an MJDS company that is filing a registrationstatement may elect to deem the Form 6-K information asfiled by specifying that the information is incorporated byreference into the registration statement.

MJDS companies should note that although they areonly required to furnish information made public inCanada, if the applicable Canadian disclosurerequirements are less comprehensive than US disclosurerequirements, MJDS companies should considercomplying with the Form 8-K requirements for similarevents to make sure all material information has beenprovided, in order to help avoid potential liability undersection 10 and Rule 10b-5 of the Exchange Act.

FPIs, including MJDS companies, are not subject to USRegulation FD, which requires prompt disclosure of



material, non-public information that has beenunintentionally disclosed to market professionals or securityholders. However, FPIs, including MJDS companies, canvoluntarily comply with US Regulation FD by publiclyfurnishing the relevant information in a Form 6-K filing.Doing so can help avoid any reputational risk or potentialliability under Rule 10b-5 under the Exchange Act.

Securities liability issues for MJDS companies Sections 11 and 12 of the Securities ActUnder section 11 of the Securities Act, an MJDS companythat issues securities in the US will be strictly liable topurchasers of its securities if its registration statement atthe time of effectiveness ‘contains an untrue statement of amaterial fact or omit[s] to state a material fact required tobe stated therein or necessary to make the statementstherein not misleading’. In addition, every person whosigns the registration statement and current directors orcertain persons who are about to become directors are alsosubject to potential liability under section 11 for materialmisstatements or omissions in the registration statement.

An MJDS company that issues securities in the US isalso subject to potential liability under section 12 of theSecurities Act. Under section 12(a)(1), an MJDS companywill be subject to strict liability for offering or selling asecurity in violation of the registration requirements ofSection 5 of the Securities Act. Under section 12(a)(2), anMJDS company is subject to strict liability for materialmisstatements or omissions in any prospectus orprospectus supplement relating to the offering filed underRules 424 or 497 under the Exchange Act, a free writingprospectus, any communication that is an offer ofsecurities or any oral or written test-the-watercommunications made under section 5(d) of the SecuritiesAct by the MJDS company as an EGC under the JOBSAct. However, if an MJDS company elects to file as anEGC, under section 105 of the JOBS Act, the MJDScompany will not be subject to section 12(a)(2) liability forresearch reports issued in connection with its initial publicoffering or other public equity securities offerings.

Underwriters participating in an MJDS offering also aresubject to potential liability under sections 11 and 12 of theSecurities Act. However, unlike the issuer who has strictliability, the underwriters have a due diligence defenceagainst such potential liability. Therefore, underwritersparticipating in an MJDS offering will generally require,among other things, company representations, a comfortletter and legal opinions from US and Canadian counselregarding adequate disclosure in the MJDS filings to helpestablish their due diligence defense.Anti-fraud liability. MJDS companies who issue their

securities in the US also are subject to anti-fraud rulesunder Section 17 of the Securities Act and Exchange Actsection 10(b) and Rule 10b-5. Under section 17, an MJDScompany issuing securities in the US will be subject toliability for material misstatements or omissions in thedisclosure package provided to an investor prior to or atthe time of the contract of sale or any fraudulent activitiesin connection with a sale of securities. Under section 10(b)and Rule 10b-5, an MJDS company will be subject toliability for use of manipulative or deceptive practices inconnection with a purchase or sale of a security and forfalse statements about, or omission of, a material fact inconnection with, the issuance of securities.

As discussed earlier, the MJDS allows eligible Canadianissuers to meet the US disclosure and periodic reportingrequirements through use of a document prepared inaccordance with Canadian disclosure standards andperiodic filings made in their home jurisdiction. Therefore,MJDS companies are not required to comply with theline-item disclosure requirements of US filing forms unlessspecifically required in the applicable MJDS form.However, MJDS forms require disclosure of all materialinformation necessary to make the required statements notmisleading. Therefore, MJDS issuers should considerwhether additional information should be disclosed toavoid potential liability under US securities law.7

Liability under Form 6-KInformation disclosed in a Form 6-K is furnished not filedfor purposes of section 18 of the Exchange Act. In otherwords, an MJDS company is not subject to section 18liability based on the disclosure in a Form 6-K. However,if a Form 6-K contains materially misleading informationor omits material information, the SEC may bringadministrative proceedings against the MJDS companywhich can result in significant fines. Moreover, if a Form6-K is incorporated by reference in a registrationstatement, an MJDS company will be subject to potentialliability under sections 11, 12 and 17 of the Securities Actbased on the Form 6-K information, which becomes partof the registration statement.

An MJDS company may also be subject to liability if itfails to make a Form 6-K filing. Failure to make a Form 6-K filing would be a violation of sections 13(a) and 15(d) ofthe Exchange Act, subjecting a company to SECadministrative proceedings. Failure to file a Form 6-K mayalso be considered an omission or a failure to disclosematerial information which may lead to liability underExchange Act section 10(b) and Rule 10b-5.



The Dodd-Frank Act and the MJDSThe Dodd-Frank Act contains disclosure requirementsthat apply to all SEC reporting companies, includingMJDS companies. Among the several requirements of theDodd-Frank Act, the following are most frequentlyapplicable to MJDS companies:• additional corporate governance requirements relating

to compensation committees or any other boardcommittee that oversees executive compensation;

• the repeal of Rule 436(g) under the Securities Act,relating to the disclosure of credit ratings; and

• additional specialised disclosure requirements relating toconflict minerals, government payment in connectionwith resource extraction and mine safety.

Corporate governance requirementsUnder Section 952 of the Dodd-Frank Act, the SECadopted rules implementing Section 10C of the ExchangeAct, which prohibits national securities exchanges fromlisting equity securities of companies that do not complywith the following Dodd-Frank Act requirements:• the independence of each compensation committee

member;• the compensation committee’s authority to retain or

obtain advice from compensation advisers;• the compensation committee’s evaluation of the

independence of compensation advisors andconsultants;

• funding requirements for payments to compensationadvisers;

• the adoption of a claw-back policy that provides forrecoupment of executive incentive compensation iffinancial statements are restated due to a materialnoncompliance with financial reporting requirements;

• the disclosure of policies regarding incentive-basedcompensation based on publicly reported financialinformation; and

• additional disclosure in proxy or consent solicitationmaterials for an annual meeting of the shareholdersrelating to the use of compensation consultants and anyconflict of interests relating to such consultants.MJDS companies are exempt from having an

independent compensation committee as long as theydisclose in their annual reports to shareholders the reasonwhy they do not have an independent compensationcommittee. It is unclear whether the other requirementsapply to MJDS companies; however, given that MJDScompanies are exempt from the proxy rules of section 14of the Exchange Act and are generally exempt from thecorporate governance rules of national securitiesexchanges, MJDS companies likely would be exempt from

these requirements. However, the SEC’s proposedclawback rules8 would, by their terms, apply to MJDScompanies.

Repeal of Rule 436(g)The repeal of Rule 436(g) under the Securities Actpursuant to the Dodd-Frank Act has required registrants toobtain and file consents from the applicable credit ratingagency when including ratings information in theirregistration statements. Since credit rating agencies arereluctant to grant their consent, these ratings have largelybeen removed from US prospectuses.




Annex AComparison of MJDS and other SEC registration forms

Exchange Act registrationforms (required when listingin the US)

Exchange Act reportingforms (required whenregistering a class ofsecurities under theExchange Act or offers andsales of securities under aSecurities Act registrationstatement)

Securities Act registrationforms (required whenregistering the offer and saleof securities in the UnitedStates)

FPI

Form 20-F, which requiresSEC-specified disclosureregarding the FPI and issubject to SEC review.

Form 20-F for annualinformation, including annualaudited financial statements.

Form 6-K for all othermaterial informationdisclosed by the FPIaccording to home-countryor stock exchangerequirements.

Form F-1, which requires along form prospectus thatincludes SEC-prescribedmaterial information aboutthe FPI.

While the disclosure requiredby Form F-1 is in accordancewith US disclosurestandards, the disclosurerequirements are somewhatless demanding than whatwould be required by FormS-1. Among other things,Form F-1 contains lessspecific requirements aboutthe description of business,and permits disclosure ofexecutive compensation inthe aggregate, unlessotherwise disclosed on anindividual basis.

MJDS-eligible issuer

Form 40-F, which consists ofall material information madepublic in Canada since theend of the previous fiscal yearand is generally not subject toSEC review.

Form 40-F for annualinformation, including theCanadian annual informationform, audited annual financialstatements andaccompanying MD&A.

Form 6-K for all other materialinformation disclosed by anMJDS- eligible issuer underCanadian or stock exchangerequirements.

Form F-10 is available for theregistration of any securityother than certain derivativesecurities by an MJDS-eligible issuer with a publicfloat of $75 million or more.

Form F-10 consists of aprospectus filed with theSEC, certain otherinformation and exhibits. Thedisclosure in the prospectusis governed by disclosurerequirements applicable inCanada, except that theMJDS prospectus may omitinformation that is applicablesolely to Canadian investorsand not material to USinvestors. The MJDSprospectus also must containspecified legends and a list ofall other documents filed aspart of the registrationstatement.

US domestic issuer

Form 10, which requiresSEC-specified disclosureregarding a US domesticissuer and is subject to SECreview.

Form 10-K for annualinformation required by theSEC, including annualaudited financial statements.

Form 10-Q for interim periodfinancial and otherinformation.

Form 8-K for disclosure ofspecified material events.

Form S-1, which is theregistration statementavailable for initial publicofferings by US domesticissuers and when suchissuers are not eligible to useother forms.

Form S-1 includes the mostextensive disclosurerequirements, which specifythe material information thatmust be included in theprospectus that is part of theregistration statement. FormS-1 also requires disclosureof other specified informationand exhibits.



ENDNOTES1. SEC Release No. 33-6902 (June 21 1991).2. Rule 405 under the Securities Act. See also Securities

Offering Reform Questions and Answers, Nov. 302005, available atwww.sec.gov/divisions/corpfin/faqs/securities_offering_reform_qa.pdf.

3. SEC Release No. 33-9245; 34-64545 (July 27 2011).4. Form F-10, available at

ustwww.sec.gov/about/forms/formf-10.pdf.5. Finra Rule 5110.6. National Instrument 44-102. See also General

Instruction II.L. to Form F-10.7. For an example of potential liability for MJDS

companies based on material misstatements andomissions in MJDS filings, see In the Matter of SonyCorporation and Sumio Sano, Release No. 34-40305(August 5 1998).

8. See www.sec.gov/rules/proposed/2015/33-9861.pdf.


http://www.sec.gov/divisions/corpfin/faqs/securities_off

http://www.sec.gov/rules/proposed/2015/33-9861.pdf


Non-US sovereign governments and theirpolitical subdivisions frequently offer debtsecurities and guarantees of other debtsecurities in the US by registering and issuing

the debt securities and guarantees under Schedule B of theSecurities Act. Schedule B is a schedule to the SecuritiesAct that sets out the requirements to be included in theregistration statements of sovereign foreign governmentsand their political subdivisions for guarantees and offeringsof debt securities. Schedule B also offers a separate andgenerally more streamlined registration process forsovereign issuers compared with the process for domesticand foreign private issuers not entitled to use Schedule B.

The justification for the more streamlined process is theability of sovereigns to satisfy interest and premiumpayments on debt securities by levying taxes. Sovereignissuers use Schedule B for issuing debt securities (sovereignissuers do not issue equity). References in this chapter tosovereign issuer include any foreign government, politicalsubdivision, international organisation and instrument-ality that is permitted to file under Schedule B.

There is no specific registration statement form forSchedule B sovereign issuers as there is for both domesticand foreign private issuers for other types of offerings (forexample, Form S-1 and Form F-1). The registrationstatement for sovereign issuers must simply contain theinformation specified in Schedule B. Although therequirements for Schedule B registration statements are farshorter, the common practice is to disclose informationanalogous in scope to that required under Form S-1.Schedule B’s short length, which allows sovereign issuersfar more latitude in drafting and the relative lack ofstatutory guidance has resulted in Schedule B practiceevolving informally through SEC no-action letterguidance, the SEC review process itself and the self-policing mechanisms of sovereign issuers and underwritersand each of their counsel.

Who can use Schedule B?Section 7 of the Securities Act provides that Schedule Bapplies to securities issued by a foreign government, orpolitical subdivision thereof. Although this phrase is not

specifically defined in the Securities Act, its meaning andby extension the types of issuers that may use Schedule B,have evolved over time along with the rest of Schedule Bpractice. Schedule B is clearly available to any non-USsovereign nation and political subdivisions of suchsovereign nation, which may include states, provinces,cities and municipalities. There are other classes of issuerswhere the application of Schedule B is unclear, especiallywith respect to nations where many corporations arepartially nationalised. In situations where Schedule Bapplicability is unclear, the issuer and its US counselshould arrange a pre-filing conference with the SEC staffto obtain clearance to use Schedule B.

The SEC staff has permitted internationalorganisations with sovereign nations as members to useSchedule B.1 Some recent examples of organisations usingSchedule B include the Council of Europe DevelopmentBank and Corporación Andina de Fomento, bothmultilateral financial institutions with European andSouth American nations as their members, respectively.The international organisations permitted to useSchedule B typically serve governmental functions andhave their financial obligations backed by the membernations in the event that the organisations cannot meettheir obligations under their debt securities. Securitiesofferings of certain international organisations, includingthe African Development Bank, the Asian DevelopmentBank, the European Bank for Reconstruction andDevelopment, the Inter-American Development Bankand the International Bank for Reconstruction andDevelopment, are governed by specific statutes andregulations that are even more favourable that ScheduleB.2

The SEC staff also has permitted issuers that are partof, or owned by, sovereign nations to use Schedule Bbecause investments in such issuers are secure fromdefault to the same degree as sovereign credits.3 Thesedecisions have typically focused on the guarantee of theissuer’s securities by a sovereign, the issuer serving agovernmental purpose and the existence of sovereignownership or control of the issuer.

CHAPTER 15

Schedule B filers


Guarantee of the issuer’s securities by a sovereign The most important factor for issuers that are part of, orowned by, sovereign nations is the existence of a sovereignguarantee or equivalent credit support of the issuer’ssecurities. The guarantee can be an express guarantee, astatutory guarantee or a legal requirement by operation oflaw requiring the sovereign to provide funding for theissuer to satisfy its obligations. A guarantee by a politicalsubdivision of a sovereign nation also is acceptable,assuming the political subdivision can levy taxes. Commonexamples of the latter are Canadian power and utilitycompanies that regularly issue Schedule B securitiesguaranteed by the province they are located in. Where anexpress guarantee is provided, the guarantee is considereda separate security just as any other guarantee of a debtsecurity, which means it must also be registered underSchedule B with the underlying debt securities and usuallyunder the same registration statement. In such cases, boththe issuer and the guarantor need to sign the registrationstatement. In such cases, both the issuer and the guarantorneed to sign to registration statement. Even where anexpress guarantee is absent but the issuer is using ScheduleB because of some other type of credit support from asovereign, the SEC staff will typically require both theissuer and the sovereign to sign the registration statement.

Whatever the exact form of the sovereign guarantee orcredit support, the SEC has generally taken the positionthat the sovereign guarantee or credit support must carrywith it the full faith and credit of the sovereign. The SECalso has viewed the legal opinion of local counsel asauthority for the sovereign’s guarantee or other necessarysupport. However, it seems unlikely that the SEC wouldgrant Schedule B status where the sovereign’s support tookthe form of a mere contractual keep-well arrangement thatfell short of a guarantee, even if the arrangement carriedthe full faith and credit of the sovereign. Nevertheless, anumber of central banks have been permitted to registerdebt securities under Schedule B even though suchobligations did not carry the full faith and credit of thesovereign or benefit from a formal sovereign guarantee orother keep-well arrangement.4

Issuer serves governmental purposeIssuers that are formed by foreign governments to performgovernmental functions are more likely to receivepermission to use Schedule B. Examples of such issuersinclude foreign national development banks and foreignmunicipal school districts. In addition, issuers engaged inactivities that bring them into excessive competition withprivate companies engaged in similar activities would notlikely be able to use Schedule B.

Sovereign ownership or control of the issuerIssuers that are owned or controlled by foreigngovernments also are more likely to receive permission touse Schedule B. The SEC staff typically looks for whole orsubstantially whole ownership of the issuer by thesovereign. With respect to control over the issuer, the SECstaff generally looks for governmental supervision,budgetary control and appointment of executives by thesovereign. In determining whether an issuer should betreated as part of a foreign government, the SEC hasapplied these criteria on the basis of all the relevant factsand circumstances.

Disclosure required under Schedule BSchedule B requires a short list of disclosures for ScheduleB registration statements compared with registrationstatements for other registered securities offerings.Schedule B specifically requires disclosure of the followingitems:• the net amount and proposed use of proceeds of the

offering;• the amount and principal terms of the sovereign issuer’s

funded (long-term) and floating(short-term) debt (bothforeign and domestic);

• any defaults by the sovereign issuer on external securitiesduring the preceding 20 years;

• the sovereign issuer’s revenues and expenditures(including deficits) during the three most recent fiscalyears;

• the name(s) of any authorised agent(s) in the US;• the name(s) of counsel will pass upon the legality of the

securities being offered;• the terms of the distribution, including the underwriting

arrangements, if any, and the names of the underwriters;• the price at which the securities are to be offered (or the

method by which the price is to be determined);• the commissions or other compensation to be paid to

the underwriters; and• other expenses of the offering.

In practice, however, underwriters and investors havecome to expect far more disclosure than what is specificallyrequired under Schedule B because of the general liabilityprovisions of US securities laws that require allinformation that would be considered important byinvestors in deciding whether to invest in the securitiesbeing offered or that is needed to ensure that the statementmade in the prospectus are not misleading.

In addition, more robust disclosure often is necessary formarketing purposes from the underwriters’ perspective.Over the years, the disclosure format for sovereign issuershas become highly standardised and includes information



regarding the home-country, its form of government andgeneral political situation, the principal features of itseconomy, its natural resources and population, its balanceof trade, its balance of payments, its aggregate externalindebtedness, other factors affecting the availability of thecurrency in which the proposed registered offering is to bemade, and the terms of the securities. In the case ofsecurities that are guaranteed by a sovereign, essentially thesame disclosure requirements apply to the sovereign.

A typical Schedule B registration statement contains aprospectus, certain undertakings (included in a Part II),the specific disclosures required by Items 3, 11 and 14 ofSchedule B and various exhibits, usually comprising theform of underwriting agreement, the form of fiscal andpaying agent agreement and the consents of governmentofficials, auditors and law firms named in the prospectus.Although Schedule B does not require audited financialstatements, common practice is to include such financialstatements (in English translation). However, the financialstatements do not need to be presented in or reconciledwith US generally accepted accounting practices.Nevertheless, sovereigns typically include someexplanation of the financial statement presentation andmethods to help US investors understand the financialstatements.

Schedule B registration statements must be filed withthe SEC and declared effective before an offering canproceed. Once Schedule B registration statements are filedthey appear on Edgar under the designation S-B with aSecurities Act file number just like any other Securities Actregistration statement. The SEC staff assigned to the officeof international corporate finance, a subdivision of thedivision of corporation finance, will review, comment onand ultimately declare the Schedule B registrationstatements effective.

Applicability of the Exchange Act and theTrust Indenture ActSovereign issuers are not required to file periodic reportsunder sections 12(g) or 15(d) of the Exchange Act. Section12(g) applies to issuers of equity securities and foreigngovernments issue only debt securities and Section 15(d)expressly exempts foreign governments and their politicalsubdivisions. Only foreign governments and their politicalsubdivisions that voluntarily list their debt securities on aUS national securities exchange must file Exchange Actreports. Instead of filing the annual and periodic reportsthat are required of domestic and foreign private issuers,sovereign issuers first file a registration statement on Form18 that includes its US national securities exchange listingapplication. Sovereign issuers then must file annual reports

on Form 18-K and may keep such reports current withamendments on Form 18-K/A throughout the year. Thedisclosures required under Form 18 and Form 18-Kthough are similar to the disclosures required underSchedule B.

Section 304(a)(6) of the Trust Indenture Act, exemptsdebt securities issued or guaranteed by a foreigngovernment or its subdivisions. As a result, Schedule Bissuers enter into a fiscal and paying agent agreement,rather than an indenture, to specify the mechanics ofissuing and paying principal and interest on the debtsecurities. In addition, sovereign debt issuances over thelast several years have included collective action clauses,under which the payment terms relating to principal,interest and maturity may be amended with only theconsent of a qualified majority of debtholders (typically75%), rather than the consent of all affected debtholders.

Shelf registrations under Schedule BRule 415 under the Securities Act, which permits delayedor continuous registered offerings (commonly referred toas shelf registrations), expressly prevents sovereign issuersfrom using shelf registrations. However, there is anuncodified but accepted practice allowing Schedule Bissuers to use a delayed or continuous offering or shelfprocedure similar to that under Rule 415 used by non-sovereign issuers.5 Under this shelf procedure, a sovereignissuer can register an amount of debt securities itreasonably expects to offer over a two-year period. ASchedule B shelf registration filing though is only availableto seasoned sovereign issuers that have registered securitiesor guarantees of securities on Schedule B within the pastfive years and have not had any material defaults on theirindebtedness for the past five years.6 Nevertheless, the SEChas permitted a non-seasoned sovereign issuer to file aSchedule B shelf registration statement, but in the limitedcase of the registration solely of its guarantees of registereddebt securities issued by banking institutions.7 In addition,the registration statement cannot be used for othersecurities and the sovereign must file a prospectussupplement each time its guarantees are issued.8

Just as in a Rule 415 shelf registration statement, a baseprospectus is filed with the registration statement to beupdated by preliminary and final prospectus supplementsas needed. The SEC reviews the registration statementwith the base prospectus containing a full description ofthe issuer and its finances and must declare the registrationstatement effective before the offering can proceed.Prospectus supplements are then filed under Rule 424(b)under the Securities Act for each offering containing thematerial terms of the offered security and any material



recent developments. Most exhibits to the registrationstatement can be filed before it is declared effective.Therefore, forms of documents that are not finalised, suchas the underwriting agreement and in some cases the fiscaland paying agent agreement, can be filed as forms beforeeffectiveness with the final versions filed as post-effectiveamendments to the registration statement. Similarly, aqualified legal opinion on the validity of the securities istypically filed before the registration statement is effectivewith a traditional validity opinion on the securities filed asan exhibit to a post-effective amendment.

Alternate shelf registration procedure on Form 18-K Seasoned sovereign issuers also may take advantage of analternative shelf registration procedure under Form 18-Kpermitted by a long line of SEC no-action letters.9

Sovereign issuers hoping to take advantage of the Form 18-K shelf registration procedure for the first time shouldrequest no-action letter relief from the SEC staff beforeproceeding. The Form 18-K shelf registration procedurealso is available for political subdivisions and instrument-alities of seasoned sovereign issuers.

The seasoned sovereign issuer must first voluntarily fileForm 18 and Form 18-K, unless it is already doing sobecause it has listed debt securities in the US. The Form18-K must include all of the information required by theform and by Schedule B, as well as any additionalinformation that would be material to investors just as inany registered securities offering. Throughout the seasonedsovereign issuer’s fiscal year, the Form 18-K is updated byfiling amendments on Form 18-K/A, rather than post-effective amendments to its Schedule B registrationstatement. Typical updates on Form 18-K/A include theinclusion of interim financial statements, revised budgetestimates and material recent developments whenconsidered necessary for disclosure purposes.

When seasoned sovereign issuers file Schedule Bregistration statements, they must incorporate by referencethe previously filed Form 18-K and all subsequentamendments. The Schedule B registration statementshould include the undertakings required by Item512(a)(1),(2) and (3) and Item 512(i)(2) of Regulation S-K normally applicable to Rule 415 offerings that, amongother things, include the obligation to include anyprospectus required by section 10(a)(3) of the SecuritiesAct and reflect in the base prospectus any facts or eventsarising after the effective date of the registration statement(or the most recent post-effective amendment) that,individually or in the aggregate, represent a fundamentalchange in the information included in the registrationstatement. However, the seasoned sovereign issuer is not

required to file a post-effective amendment otherwiserequired by the undertakings if the information requiredto be included in a post-effective amendment is containedin any report filed under the Exchange Act that isincorporated by reference in the registration statement.

At the time of any shelf takedown, the seasonedsovereign issuer must file a prospectus supplement underRule 424(b) of the Securities Act that includes a completedescription of the securities being offered and any materialrecent developments since the date of the base prospectusor the last Form 18-K that are not already filed on Form18-K/A. The prospectus supplement should state thatcopies of any documents incorporated by reference and allexhibits will be furnished promptly upon request and freeof charge. The information and documents required bySchedule B to be described or filed in or with theregistration statement that would typically be filed by post-effective amendment at the time of an offering (forexample, the underwriting amendment, the names andaddresses of the underwriters and an itemised list ofexpenses and legal opinions) are instead included in (or asexhibits to) the Form 18-K or Form 18-K/A andincorporated by reference into the registration statement.

Limitations on sovereign liabilityWhen issuing Schedule B debt securities, sovereign issuerstypically appoint an agent in the US for service of processand submit to a particular US jurisdiction for any lawsuitsor actions related to the securities (typically New York stateor federal courts). The consent to service of process and thesubmission to jurisdiction though expressly carve outactions arising out of or based on US federal or statesecurities laws. Sovereign issuers also typically waive theirsovereign immunity, although the waiver does not apply toactions arising out of or based on US federal or statesecurities laws. However, whether a sovereign can assertsovereign immunity from US federal securities lawsremains an unsettled question.

The Foreign Sovereign Immunities Act of 1976 (FSIA)grants sovereign immunity to sovereigns and their agenciesand instrumentalities subject to certain exceptions.10 Oneexception provides that sovereign immunity does not applyin actions based upon: (1) a commercial activity carried onin, or having substantial contact with, the US; (2) an actperformed in the US in connection with a commercialactivity of the sovereign elsewhere; or (3) an act outside theterritory of the US in connection with a commercialactivity of the sovereign elsewhere that causes a direct effectin the US.11 Although not directly applicable to sovereignimmunity under US federal securities laws actions, the USSupreme Court has held that a sovereign’s issuance of debt



obligations was a commercial activity under the FSIA andaccordingly, the sovereign was not immune to a breach ofcontract claim.12

Acts of stateA claim of sovereign immunity can be further complicatedby the acts of state doctrine under which US courts deferto foreign courts and will not substitute their ownjudgments if an act by a sovereign issuer that injuressecurity holders is an act by that sovereign issuer within itsown territory. Examples of such actions include changes incurrency controls that result in restrictions on payments inforeign currencies, changes in economic policy and acts ofwar. This means that even if a US court were to ignore aclaim of sovereign immunity in a securities action againsta sovereign issuer, the sovereign issuer may still be able toavoid or limit liability if an act of state (as opposed to acommercial activity) caused the injury to securityholders.

Jurisdiction, immunity and enforcement disclosureSchedule B registration statements typically includedisclosure regarding the jurisdiction, immunity andenforcement issues discussed above. The disclosure usuallyis found in the prospectus towards the beginning, in therisk factors section or in the description of debt securitiessection. The disclosure needs to be tailored to the relevantjurisdiction and the particular laws governing the securitiesand the sovereign issuer. The most common points coveredin the disclosure include the following:• because the issuer or guarantor is a foreign sovereign

government, it may be difficult to obtain or enforcejudgments against it in US courts or in the sovereign’scourts.

• the sovereign issuer has appointed its consulate in theUS or another agent for service of process.

• the sovereign issuer has submitted to the jurisdiction ofUS federal and state courts in New York and waivedimmunity from jurisdiction and any objection that itmay have to the venue of such courts.

• the sovereign issuer reserves the right to plead sovereignimmunity under the FSIA in actions brought against itunder US federal securities laws or any state securitieslaws, and its submission to jurisdiction, appointment ofthe agent for service of process and waiver of immunitydo not include such actions.

• in the absence of the sovereign issuer’s waiver ofimmunity with respect to such actions, it would beimpossible to obtain a US judgment in an actionbrought against the sovereign issuer under US federal orstate securities laws unless a US court were to determinethat the sovereign issuer is not entitled under the FSIA

to sovereign immunity with respect to the action.• execution of a lien on the sovereign issuer’s property in

the US to enforce a judgment in the US may not bepossible except under the limited circumstancesspecified in the FSIA, and even if securityholders are ableto obtain a judgment against the sovereign issuer in theUS or in the sovereign issuer’s courts, they might not beable to enforce it in the sovereign issuer’s home country.

Regulation MRegulation M governs the activities of underwriters,issuers, selling securityholders and other offeringparticipants in connection with securities offerings andwas adopted by the SEC to prevent manipulative conductby persons with an interest in the outcomes of securitiesofferings. Rules 101 and 102 of Regulation M prohibitissuers, selling securityholders, distribution participantsand any of their affiliated purchasers from directly orindirectly bidding for, purchasing, or attempting to induceanother person to bid for or purchase a covered securityuntil a restricted period has ended. Covered securities, forthis purpose, mean the securities being distributed or anyreference security, into which a subject security may beconverted, exchanged or exercised, or under which theterms of the subject security may in whole or significantpart determine its price.

Rules 101 and 102 apply to sovereign debt securities.Sovereign issuers cannot satisfy the requirements of onepopular exemption from Regulation M for issuers whosecommon equity securities have a public float value of atleast $150 million because sovereign issuers do not issueequity securities. However, there is an exemption forsovereign debt securities that are rated investment grade,similar to domestic or foreign private non-convertibleinvestment grade debt.13

In cases where the sovereign debt securities are not ratedinvestment grade, the SEC staff has granted no-actionletter relief from Rule 101 to permit the lead underwritersof sovereign issuances and their affiliates to conductmarket-making activities during the restricted periodimposed by Regulation M. In addition to being helpful formarket making in sovereign debt, the SEC no-action letterrelief also facilitates the reopening of previously issuedseries of sovereign debt securities, a fairly common methodof raising capital for sovereign issuers but one requiring anexemption from Regulation M because the distributedsecurities are identical to those already outstanding. Thisrelief has been granted in a line of SEC no-action lettersand is typically based on the following criteria, which arenot exhaustive and not all of which need be satisfied inevery situation:14



• The issuer is a sovereign government whose financialaffairs are widely reported on.

• The issuer’s public sector external debt is large inprincipal amount, typically well over $1 billion.

• The market for the debt securities is expected to behighly liquid and to have significant depth of trading.

• The underwriters estimate that a significant number ofdealers (at least 10) are expected to regularly place bidsand offers for the debt securities, of which a number (atleast five) are expected to be continuous market makers.

• The underwriters estimate that daily purchases and salesof the debt securities by the underwriters and theiraffiliates will not account, on average, for more than apercentage of the average daily trading volume in thedebt securities (this number is typically not higher than20% to 25% but has been as high as 30% and 35%).

• The debt securities are expected to trade primarily onthe basis of a spread to the US Treasury security with acorresponding maturity, in a manner similar to tradingin investment grade debt securities.

• Bid and ask prices for the debt securities in the over-the-counter market is expected to be widely available.

• The debt securities are expected to be rated not far belowinvestment grade (for example, BB by Standard & Poorsand Ba2 by Moody’s).

• The debt securities are offered under the sovereign’sSchedule B registration statement.However, even if the SEC is satisfied that enough criteria

are satisfied, the relief will still be subject to twoconditions. First, the prospectus supplement for theoffering must disclose that the underwriters and certainaffiliates have been exempted from the provisions ofRegulation M. Such disclosure typically is included in theunderwriting section of the prospectus supplement.Second, the underwriters and their affiliates must providethe SEC’s division of trading and markets, upon request, adaily time-sequenced schedule of all transactions in thedebt securities made during the period that begins fivebusiness days prior to the pricing of the offering and endswhen the distribution of the debt securities in the US iscompleted or abandoned.

Requirements under FinraSchedule B offerings are subject to Finra’s corporatefinancing rule (Finra Rule 5110). Finra Rule 5110regulates, among other things, the pricing and conduct ofdue diligence for registered offerings in which a Finramember is a participant. Under Finra Rule 5110, no Finramember or any of its associated persons may participate inany manner in any public offering of securities unlesscertain documents and information relating to the offering

have been filed and reviewed by Finra, subject to certainexceptions. In addition, under Finra Rule 5121, no Finramember that has a conflict of interest may participate in aregistered offering unless the offering meets one of thespecified exemptions or a qualified independentunderwriter participates in the offering. Under Finra Rule5121, a conflict of interest exists if:• The securities are to be issued by the Finra member.• The issuer controls, is controlled by or is under common

control with the Finra member or the member’sassociated persons.

• Where at least five percent of the net offering proceeds,not including underwriting compensation, are intendedto be either used to reduce or retire the balance of a loanor credit facility extended by the Finra member, itsaffiliates and its associated persons (in the aggregate) orotherwise directed to the Finra member, its affiliates andassociated persons (in the aggregate).

• As a result of the registered offering and any transactionscontemplated at the time of the registered offering, theFinra member will be an affiliate of the issuer, the Finramember will become publicly owned or the issuer willbecome a Finra member or form a broker-dealersubsidiary.However, sovereign debt with a maturity of at least four

years that is rated investment grade is exempt from thefiling requirements under Finra Rule 5110. If sovereigndebt does not qualify for this exemption, then theSchedule B registration statement must be filed with Finra,the sovereign issuer must pay a filing fee and certaindisclosures regarding the conflict of interest must beincluded in the prospectus for the offering. For moreinformation regarding Finra, see Chapter 12 (Regulationby the Financial Industry Regulatory Authority).

Documentation for a Schedule B offeringThe documentation for Schedule B offerings is similar tothe documentation for other registered securities offerings.However, the documentation needs to reflect thedifferences between each sovereign issuer and its structureand governing laws, and the underwriting agreement andthe legal opinions will materially differ from otherregistered offerings. There are no comfort letters issued inSchedule B offerings as Schedule B does not requireaudited financial statements to be included in theregistration statement. In addition, in place of boardresolutions, sovereign issuers must obtain governmentalapprovals for the Schedule B offering. The Schedule Bdocumentation typically includes the following:• the Schedule B registration statement and prospectus

(and for shelf issuers, prospectus supplements together



with Forms 18-K and 18-K/A);• a free writing prospectus filed with the SEC disclosing

the material terms of the securities offered;• a fiscal and paying agent agreement;• all certificates, authorisations and receipts required

under the fiscal and paying agent agreement, which aresimilar to those required by standard indentures andtypically executed by senior members of the sovereignissuer’s treasury department, finance ministry or similarfinancial subdivision;

• a DTC issuer blanket letter of representations;• any listing applications and confirmations if the

securities are to be listed on a US national securitiesexchange.

• an underwriting agreement;• any applicable home country governmental approvals;

and• legal opinions required under the underwriting

agreement.

Underwriting agreementA copy of the underwriting agreement must be filed as anexhibit to a Schedule B registration statement. In the caseof shelf registrations, a form of underwriting agreementtypically is filed with the registration statement, and afteran offering the sovereign issuer will update the form ofunderwriting agreement with the final underwritingagreement filed as an exhibit on Form 18-K/A. Theunderwriting agreement between the sovereign issuer andthe underwriters will be very similar to underwritingagreements used for other registered offerings. Thearrangements relating to service of process, jurisdictionand conditional waiver of sovereign immunity (asdiscussed above) will be set out in the underwritingagreement. Although certain of the representations andwarranties given by the sovereign issuer will mirror those ofnon-sovereign issuers, there are a number that are uniqueto sovereign issuers:• The obligations of the sovereign issuer under the debt

securities are supported by the home country’s full faithand credit.

• No documents or instruments need to be registered,recorded or filed with any court or other authoritywithin the home-country (other than with respect totranslations) to ensure the legality, validity,enforceability, priority or admissibility in evidence onthe sovereign issuer of the underwriting agreement, thefiscal and paying agent agreement, the securities or anyother document or instrument related to the offer andsale of the securities.

• There is no tax, levy, deduction, charge or withholding

imposed by the sovereign issuer or any of its politicalsubdivisions on any transaction or document executioncontemplated in the underwriting agreement.

• The statements with respect to matters of the sovereignissuer’s governing law set forth in the prospectus arecorrect.

• The sovereign issuer has the power and authority to issuethe securities.

• Any failure of the sovereign issuer to make the necessaryor appropriate provisions in its budget for the timelypayment of all amounts due under the securities will notconstitute a defence to enforcement of the obligations.

• All consents to service of process, submission tojurisdiction and waivers of immunity are binding on thesovereign issuer.

Governmental authorityInstead of board resolutions authorising the issuance ofsecurities and the performance of the obligations underthose securities, Schedule B issuances requiregovernmental approvals. The action required and themethod of documentation will vary with each sovereignissuer and will depend on how the home-country’sgovernment is structured. The authorisation can be assimple as an executive decree or may require multiplegovernmental bodies to issue letters, certificates andresolutions. For example, a home country’s legislature,central bank, and treasury and finance ministry may allneed to authorise the securities and obligations. USsecurities counsel for the sovereign issuer and for theunderwriters must work closely with local counsel indetermining what is required under the home-country’slaws, and the process and documentation required willneed to be covered in the legal opinion to be provided bylocal counsel.

Legal opinionsSchedule B requires validity opinions to be filed as exhibitsto the registration statement, along with Englishtranslations, if needed. The validity opinions must cover allof the applicable laws or other home country actsauthorising the securities. Sovereign issuers typicallyengage US counsel and sometimes local counsel (in thehome country) to provide legal opinions, while theunderwriters engage both US counsel and local counsel (inthe home country). US counsel and local counsel (as wellas in-house counsel for the sovereign issuer) provide legalopinions to the underwriters. In-house counsel for thesovereign issuer typically is a top-ranking attorney in thehome country’s department of justice or finance.

The matters covered in the opinions from US counsel



are similar to those covered in opinions for other registeredofferings, including the validity of the securities and theadequacy of the disclosure in the Schedule B registrationstatement and the prospectus (often referred to as the 10b-5 paragraph). Similarly, the opinions from local andin-house counsel cover many of the same matters coveredin local and in-house counsel opinions for other registeredofferings. However, there will be certain opinion pointsincluded in the opinions from local and in-house counselthat are unique to sovereign issuers and that mirror thesovereign issuer’s representations and warranties containedin the underwriting agreement, including the following:• The sovereign issuer has full power and authority under

its constitution or similar governing framework toperform its obligations under the debt securities, theunderwriting agreement, the fiscal and paying agentagreement, and all transactions contemplated by thoseagreements.

• There is no conflict with the general laws of the homecountry and those laws specified in the opinion thatcover the authorisation of the sovereign issuer to incurdebt obligations.

• All necessary action, authorisations, approvals andconsents, which are itemised in the opinion, from allgovernmental authorities within the home country havebeen taken and obtained and are in full force and effect.

• The choice of law is valid and the sovereign issuer’sconsent to service of process, submission to USjurisdiction, waiver of objection to venue and waiver ofsovereign immunity are legal and binding under thehome country’s laws.

• It is unnecessary to file or register any transactionagreement, document or other document with any courtor other authority in the home country, or to pay anyregistration fee or stamp or similar tax to ensure thelegality, validity, enforceability or admissibility inevidence of such agreement or document.

• The transaction agreements are in proper legal formunder the laws of the home-country for enforcementagainst the sovereign issuer.



ENDNOTES1. See SEC no-action letter, Nordiska

Investeringsbanken (December 30 1981).2. See, eg, General Rules and Regulations Pursuant to

§ 9(A) of the European Bank for Reconstruction andDevelopment Act, 17 C.F.R. §§ 290.1 et seq.

3. Certain foreign banks that are eligible to useSchedule B may also be able to take advantage of theexemption from registration under section 3(a)(2)under the Securities Act if they issue securitiesthrough a US federal or state branch. For moreinformation regarding section 3(a)(2) offerings, seeChapter 6 (section 3(a)(2) and considerations forforeign banks financing in the United States).

4. See SEC no-action letter, Bank of Greece (June 21993).

5. See SEC Release No. 33-6240 (September 10 1980);SEC Release No. 33-6424 (September 2 1982).

6. See SEC no-action letter, Republic of Venezuela(November 24 1980).

7. See SEC no-action letter, Commonwealth ofAustralia (February 26 2009).

8. See id.9. See, eg, SEC no-action letter, Canada and its Crown

Corporations (April 16 1991); SEC no-action letter,United Mexican States (February 25 1994); SEC no-action letter, Republic of Hungary (September 272007).

10. See 28 U.SC. §§ 1602–1611.11. See 28 U.SC. § 1605(a)(2).12. See Republic of Argentina v. Weltover, 504 US 607

(1992).13. See Rules 101(c)(2) and 102(d)(2) under

Regulation M.14. See, eg, SEC no-action letter, Republic of Uruguay

(June 24 2008); SEC no-action letter, Republic ofPanama (January 16 2004); SEC no-action letter,Republic of Colombia (December 2 2002); SEC no-action letter, Regulation M – Sovereign BondExemption (January 12 2000).



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